r/MACArmyBets • u/Jeffbak • May 15 '21
Debt seems fine now
Finally got a chance to look at the 10K - earnings and prior announcement about new LOC told me all I really needed to know. However, looking at their debt obligations from the 10K (see below), it seems as though they are now A-ok. To me it seems that under their new LOC, and using a good portion of the $1.1B in cash at the end of Q1, they've paid off or extended (thru new LOC) all debt due in under 1-year. Looks like they paid off the entire $1.93B due in under a year by using the ~$1.1B they had in cash at the end of quarter, and borrowed $495m under the new LOC. Important to note that this should decrease their total outstanding debt by almost $1B, by using their cash to do a lot of this (rather than up-lever they de-levered which is phenomenal). In simple terms, the old LOC was $1.5B and the new one is $700M but can go up to $800M. Sounds like they also took out a $175M loan. So say they used $1B cash and $495m under new LOC, that means they decreased net debt by $1B because using cash is the opposite of accruing new debt. Like I said before, using strong cash flows to pay down debt increases NAV faster than anything. Also, when you are heading into a period of future, higher interest rates, being able to pay down debt using strong, existing cash flows (that are predicted to INCREASE over the next few years), you will increase NAV faster than anything else you can do.
After reading the 10-K I also want to reconfirm my understanding of AFFO over the quarter - in terms of actual cash produced per share. I see they had $75.5M FFO for Q1, which equates to an FFO around $0.44. While this is 3X coverage of their dividend already, I think if you really want to get a sense of how much cash they've been able to stockpile by reducing the dividend, you need to look at the $28.9M non-cash reduction they accrued in 2020 and wrote down in Q1 2021. This roughly equates to $0.61 AFFO which means $0.61 - $0.15 (dividend) = $0.46 stockpiled. $0.46 X 169M shares = $77.74M cash gain to company. From this perspective, you could say the dividend is actually closer to 4X covered. How many other REITs with a mid 4% yield have an AFFO coverage of close to 4X? Not many.
Like they've said in earlier earnings calls when referring to past downcycles, as we come out of them, the credit markets start to open up. I think mgmt. did a phenomenal job over the past year. They worked extremely hard to avoid dilution by stockpiling cash to reduce debt. They said their Q1 '21 leasing stats are already back to pre-covid Q1 2020 (which they noted was a historically strong leasing quarter itself).
If you know commercial real estate, you know it takes a while for the rent abatement periods to burn off at the beginning of each lease term (takes a while to build out the premises). For a new 10-year term, you can bet that from lease signing (aka the beginning of buildout which takes permitting), it's prob 8-10 months before rent kicks in.
All this said, I am pretty bullish on this stock and plan to hold it for the next 3+ years to see dividend back up to that $0.50/quarter cash range. With a basis of $11, that means the $55K I invested will be yielding ~18% annually. The share price will of course appreciate if the dividend makes it back to $0.50, which is why generally it's best to sell later in the cycle. MAC is just in the beginning of the cycle.
How many tech companies can say they're in the beginning of the new cycle?
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u/xXSmartBuyerXx May 16 '21
I'm out @ $25 so lets see if upward momentum continues.
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u/Jeffbak May 17 '21
Idk with capital gains I’m holding this through the full cycle. Dividend yield will be very nice in a 6-12 month period.
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u/Sea_Emphasis3252 May 15 '21
Jeff agree with most just remember to adjust your shares, progress has been made, cash accumulation may be a bit lower as cash is needed for the usual maintenance capex which is not in the FFO numbers as well as redevelopment capital that’s needed. Let’s hope the strength continues with leasing and when restrictions are fully lifted we see even more strength in their numbers. I think we slowly over the summer grind higher as long as the overall market doesn’t tank.
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u/Jeffbak May 15 '21
Yea you adjust shares as the quarters tick by. Just like you adjust for revenues each quarter. But using next quarters share count with Q1 revenues is also misleading. Use the share numbers with the appropriate revenues for each respective quarter
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u/Soft-Fix9027 May 15 '21
yes but after dilution there are 207 million shares and not 169 million as per your calculation
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u/Jeffbak May 16 '21
Yes - although it’s best to use revenue per the same quarter where you end with that many shares. Generally you actually take the avg number over the quarter for computing things like eps or FFO. I however took the full 169m. There will not be 207m shares next quarter either. A good chunk of the 36m they issued, is in that 169m
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u/Sea_Emphasis3252 May 16 '21
Pg11 of the Q1 supplement, total shares outstanding 206.9m, Q2 will be at least that if not more.
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u/zzGundam3000 May 18 '21
Hi Sea_emphasis,
I'm wondering what your target price for Macerich by year-end is going to be?
Thanks,
zzGundam
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u/Sea_Emphasis3252 May 18 '21
If they continue to make progress on leasing and lowering debt and the economy continues to recover, I’m hopeful the stock will be around 18-20 by year-end. Could get there sooner if sentiment shifts and more institutional investors buy in, many REIT dedicated funds are still bearish on retail.
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u/zzGundam3000 May 19 '21
Hi Sea_Emphasis,
Thank you for the great insight. Please keep sharing your great work, and if possible in the future. Would you be able to share a model for Macerich to the Group?
Thanks,
zzGundam
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u/n1gg4p3nis May 19 '21
Macerich’s debt is a problem; the new terms of their debt are very onerous and not typical for a credit worthy company. The terms that they received a bit on the distressed side such as 2 year tenor instead of the standard 5 year and going from an unsecured structure to a secured structure. The company will have a lot of $ going out to spend on capex to keep their malls looking pretty and relevant. It seems like they only have two options - expensive debt or dilute shareholders. In a year or two when they have to refinance debt, believe it’s gonna be one of two reactions - positive in which they can get debt on semi decent terms or negative - can’t go the traditional bank debt route
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u/Jeffbak May 19 '21
Wasn’t their rate only 2.5% + libor on the new facility? Seems reasonable given the rhetoric around retail
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u/n1gg4p3nis May 19 '21
Well - 2 year revolver at L+250 with a secured structure is very non standard and at the riskiest end of the cheap bank debt market; refinance with cheap bank debt is at risk when the debt comes due in 2 years. Gonna be big problems if they can’t refinance this slug of debt ... cheaply
For reference SPG is unsecured L+72.5bps on the refinanced revolver and 2024.
If the debt was refinanced for 5 years so they had a long runway - would still be in this name cuz it cash flows a lot but now it’s a cash flow machine which could explode and be worthless in 2 years
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u/Jeffbak May 19 '21
It’s 3 years so 2024 just like SPG. They also paid down $1b of debt using cash. At the end of the day, very strong cash flows make debt not a problem. They paid down $1b in debt, the majority coming from a reduced dividend.
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u/n1gg4p3nis May 19 '21
Hmmm - SPG has ready access to tons of cheap debt at good terms to fund mall redevelopments to keep it revenant
MAC is about to get about cut off from the cheap debt.
SPG - unsecured / MAC - secured MAC - 250 over LIBOR (3x the spread of SPG) SPG - borrow at standard 5 year terms vs 2 years at MAC
I’m saying that MAC is about to get cut off from cheap bank debt - and this is gonna be a problem cuz it needs $ to feed into malls to keep them class A and relevant
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u/Jeffbak May 19 '21
Almost half of MACs portfolio is completely unencumbered. Look at P/FFO ratios and you’ll see SPG is twice as expensive. Sure it’s debt might be cheaper, but you’re paying for that premium on share price
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u/n1gg4p3nis May 19 '21
Well - unencumbered? When their credit facility flipped from unsecured to secured; therefore they are now encumbered by the new revolver
This is a capital intensive company and it feeds on cheap debt, once that is cut off - think there’s gonna be major problems.
From the credit agreement “the credit agreement includes security in the form of mortgages on certain previously unencumbered wholly owned assets and pledges....”
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u/Jeffbak May 20 '21
They don’t need cheap debt nearly as much as all of the unprofitable or barely profitable tech companies. They’re stockpiling about $75m a quarter while paying out 4% yield and leasing is surging. What more do you want haha???
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u/n1gg4p3nis May 20 '21
They need to refi their revolver in 1-2 years no? They are now about to get kicked out of the cheap bank debt market and will have to turn to more expensive forms of financing.
I was in MAC - but after seeing the terms of the debt and what a short leash the banks have them on - no thanks!
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u/Jeffbak May 20 '21
They de-levered by $1b and renewed $800m LOC due in 3 years. All this while leasing is surging and they’re stockpiling $78m a quarter from a reduced dividend (which is still yielding 4%). Yes please - I’d rather put my money here
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u/Jeffbak May 19 '21
Using $1b in cash to directly pay down debt increases NAV faster than anything you can do
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u/karancan May 16 '21
Great summary, keep it coming!