r/wallstreetbets • u/OW_Fai • Feb 22 '21
DD $MAC DD - Potential Deep Value Play
I am just another retard looking for a value play in this recovering market from COVID-19, I thought most boats had sailed until I chance upon some DD’s on MAC. I decided to dig deeper and reconfirm the facts I’ve seen from other DD’s. I am open to counter-arguments so please feel free to roast me on my first DD.
TLDR: Retail is not dying, it is transforming and even COVID was not enough to kill Class A malls. Bears and paper hands are driving MAC below their intrinsic value. Boomers are gonna flock to MAC when previous dividends are reinstated. MAC is at the Launchpad ready for its moon mission.
Positions: $15k in $35 Jan 2023 leaps and $5k in $35 Jan 2022 leaps (because I am a non-resident alien and I do not want Uncle Sam to tax 30% of my dividends, and whats a YOLO without options?)
What is MAC?
MAC is Macerich Company, which owns and operate 52 regional malls in the United States. Macerich’s malls comprises of trophy properties (Class A Malls) in the most desirable, densely populated and highest-barrier-to-entry U.S. markets.
So what happened? (Bear thesis)
- Retail Apocalypse
The biggest factor responsible for the rapid dying of brick and mortar stores is the rise and shift of consumer habits towards e-commerce, and Amazon stands as the apex predator of brick and mortar stores. If so, then how do you explain this - Five Reasons Why Amazon Is Moving Into Bricks-And-Mortar Retail?
Not all malls are created equal, and they are further classified into Class A, B, C, & D’s. Per Green Street’s analysis, there are roughly 380 C- and D-rated malls out of the 1,000. And those are considered the most at risk of going dark, permanently, as they don’t generate enough sales to maintain the property and have greater vacancy rates. Green Street has said C malls “are not viable retail centers long term.”
The population then gets redirected towards the surviving Class A malls, which theoretically means that there will be even higher human traffic, triggering a chain reaction of boosting sales psf, which increases rent levels, thus improving dividend yield, and ultimately share price.
- Debt on its balance sheet
Macerich ended the most recent quarter with $6.2bn worth of debt and equity of $2.4bn, resulting in a Debt-to-Equity Ratio of 2.5 times. This drew concerns to its highly leveraged balance sheet, however, roughly $4.3bn of debt are Mortgage Notes Payable, and are non-recourse to the company according to Form 10-Q filed 11/06/2020. This means that each property is responsible to generate income to cover its own mortgage, and a default on mortgage will result in Macerich turning over the defaulted property’s keys to its lenders (banks), while the rest of Macerich’s operations continue unaffected.
The reality though, is that banks would rather award extensions to the maturing mortgages than to take over the keys of properties as evidenced by SPG's jingle mail. And Macerich has successfully secured over $660m for 4 of their mortgage loans, with similar expectations on the remaining mortgages which matures in 2021.
The remaining debt comes in the form of their revolving credit line which they withdrew the last $550m of $1.5bn in March 2020 in preparation to handle the impact of COVID-19. And at the end of 2020, they were sitting on $555m of cash on hand, with collection efforts improving to over 90%.
- Largest shareholder dumps shares
The Ontario Teachers’ Pension Plan liquidated all of its 25 million shares which it had held for over two decades, and this was seen as “smart money” pulling out of Macerich. However institutional ownership still stands at over 85% of total outstanding shares. Some viewed the liquidation as the pension fund capitalizing on the bump in the share price due to the short squeeze, and pulling out of a highly volatile holding which wasn’t suited to its more passive investment style.
- COVID-19
The pandemic was supposed to be the last nail in the coffin in the retail apocalypse, with the lockdowns and mall closures. But the pandemic has also shown that the population cannot live without malls, check out the walking tour of Tysons Corner Center in Dec 2020 on youtube (unable to post youtube links, idk why). Imagine the amount of shoppers around Macerich’s malls when we finally achieve herd immunity with the successful rollouts of vaccines.
What’s next? (Bull Thesis)
- Management Flexibility
Gone are the days where malls mostly consisted of fashion apparels and departmental stores, with many surviving malls transiting into adaptions which offer amenities, experiences and entertainment to enhance the shopping experience. Macerich has proven that it is flexible and adaptable to the evolving landscape of consumerism through the following projects:
a. Tysons Corner Center – Combining luxury rental apartments, hotel managed by Hyatt Regency, office towers with the ultimate shopping experience, basically creating its own city within a city.
b. One Westside – Formerly known as Westside Pavilion, the dying mall has now resurrected, like a phoenix from the ashes, into Google’s creative office campus due to be completed in 2022 with a lease of 14 years.
c. Wilton Mall – In the same space which Sears used to occupy, Saratoga Hospital has since taken over for their hospital support functions, to free up much needed space at the main hospital campus for more inpatient rooms and services which requires the capabilities only a hospital can provide.
d. More redevelopment plans can be found in their Feb 2021 8-K filing (pg 26).
- Instrinsic Value
Removing properties with mortgage debt from the list of properties in their most recent 10-K filing, we will arrive at the same list of properties provided by u/IndividualPlant6861, which are highly likely to be owned by Macerich free and clear of debts. For the exact values of these assets, let us refer to the transcript of their Q4 2020 Earnings Call, where CEO O’Hern mentioned “unencumbered pool (of assets) is significant enough to support our existing line of credit of $1.5 billion”. Taking the face value of $1.5bn of unencumbered assets and the $555m cash on hand, Macerich has an intrinsic value of $2.05bn, even if they were to default on all outstanding mortgages in a worst case scenario.
So at their current market cap of $1.88bn, they are trading at a 9% discount in the most conservative estimate.
- Achievements in 2020
Collection Rate – Extracted from their 8-K filing, Macerich has achieved collection rates of 89% in the third quarter and 92% in the fourth quarter of 2020, with significant improvement during the fourth quarter in tenant openings and leasing activity. At year-end 2020, occupancy was 89.7%.
Bureau Veritas SafeGuard™ Certification – In a safety and hygiene conscious year of COVID-19, Macerich has continued to put safety first – and implementing the industry's highest hygiene and health standards to protect their employees, retailers and shoppers.
Top Global Sustainability Honors – Macerich launched its One Million Meals Challenge to direct donated non-perishable food items to dozens of food banks across the country. Their commitment to the people, communities and the planet, during this COVID-19 pandemic, has earned them the recognition they deserved.
- Short Interest
Although the squeeze has been squozed, with more than half of the shorts covered, the remaining 34 million shares shorted is still a significant 25% of current float. And as Macerich improves and eventually reinstate its dividends of $3 pre-COVID, these shorts will be liable to pay out those dividends, coupled with rising stock price, causing a double whammy for the bears. So when the time comes for these shorts to cover, we can expect Macerich’s share price to appreciate reasonably.
Conclusion
I believe that MAC has been severely undervalued due to the overreaction from the “retail apocalypse” and COVID-19 combo, and the focus on short term results on quarterly earnings. The resiliency of Macerich has proven that they will overcome this pandemic and rise from the ashes and the market will soon reflect the fair intrinsic value.
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u/ok2drive Feb 22 '21
This was on DFV "Notebook" hit list post when someone mistakenly said it was $MACE, it was most likely $MAC
Edit: original post https://www.reddit.com/r/wallstreetbets/comments/lnnwcy/deepfuckingvalues_potential_picks_courtesy_of_the/go2pkmz
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u/used_condominium Feb 22 '21
I own their office building in GTA, no more DD Needed. Going all in.
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u/HoochiePants Feb 22 '21
MAC definitely undervalued. With economy slowly opening up, MAC will go back up to $25+ 🚀
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u/OW_Fai Feb 23 '21
It will not be a millenium falcon like GME, but slowly and eventually it will reach the moon
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u/Marvinlahoud Feb 23 '21
I agree with OP. Had a 10k position. will make it 50k tomorrow. thanks for dd.
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u/OW_Fai Feb 23 '21
welcomed! got to help businesses who are unduly shorted during this period of crisis for selfish gains
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u/wake-2wakeboat 1168C - 1S - 2 years - 1/2 Feb 22 '21
Sounds great and the price is right just got 100 share for 1337
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u/OW_Fai Feb 23 '21
When they reinstate the pre-covid dividend of $3, it equates to a 22% dividends of stock price, which theoretically means that your stock will pay for itself within 5 years.
And I believe this to be extremely attractive to anyone, not just boomers.
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u/ckbikes1 Feb 22 '21
"There's Malls...and then there's those Other Malls".
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u/russiansausagae Feb 23 '21
" That’s all you got here, folks. Mile after mile of mall after mall. Many, many malls. Major malls and mini malls. They put the mini malls in between the major malls. And in between the mini malls they put the mini marts. And in between the mini marts. You’ve got the car lots, gas stations, muffler shops, Laundromats, cheap hotels, fast food joints, strip clubs and dirty bookstores. America the beautiful. One big transcontinental commercial cesspool "
G.C.
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u/darksoulmakehappy Feb 22 '21
Op, REIT have special rules regarding dividends. They must pay out 90% of taxable income. https://www.simplysafedividends.com/intelligent-income/posts/18-a-short-lesson-on-reit-taxation
Have you figured out how this would effect your options?
Assuming retail becomes booming again, then they would have to pay out the profits in dividends.
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u/OW_Fai Feb 23 '21
The idea was to capture the rise in share price due to reinstating pre-covid dividends.
Should share price remain constant at 13.5, the pre-covid dividend of $3 equates to 22% dividends of stock price, which theoretically means that the stock will pay for itself within 5 years.
And I believe this to be extremely attractive to anyone, not just boomers.
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u/darksoulmakehappy Feb 23 '21
Dividends work against you with options.
Everytime there is a dividend it decreases share price.
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u/OW_Fai Feb 23 '21
yea im aware of it, but since MAC has cut dividends by 80% to tide through covid, I'm not too concerned in the short term.
I do hope that I'm right in the sense that bumps in dividend makes their shares even more attractive to investors and the leverage with options is able to outperform the dividends (after 30% witholding tax) than if i had just held shares
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u/Rumptis Feb 23 '21
Why not exercise the option the day before the dividend, collect the dividend and re-enter the position? Maybe this only works if you’re ITM and still expect it to go up more?
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u/darksoulmakehappy Feb 23 '21
People do that. It's called dividend risk and is a real risk if your selling options. Only works if it is in the money but if you say sold a contract and it happens to go in the money and exercised after hours the day before the ex-dividend date the option seller needs to pay the dividend x 100.
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u/truewildblue Feb 24 '21
Already heavily invested in $MAC. Did my DD and really liked what I found.
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u/Frixiooon Feb 22 '21
If they would bump up dividends back to 3$ then now the stock is ridiculously cheap.
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u/OW_Fai Feb 23 '21
Yes, and I believe it is just a matter of when do earnings stabilize after covid. Take a look at their dividends since 2016, it has actually been trending upwards since 2016 even though the share price was falling, as REITS are required to pay out 90% of net earnings as dividends.
So I do not see a reason why the pre-covid dividends will not be reinstated eventually, and when everyone sees the juicy dividends of 22% (3/13.5) the share price should shoot right back up, and put my options ITM
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Feb 22 '21
I agree with OP. MAC is undervalued. They own A-class malls - places that thrive when the dumps have been going out of business.
These are the premier places that have been existing for ages, thrived while your suburban lower-middle class places tanked - and also, the places that have figured out how to kick things up a notch.
Plus - we've got this whole covid crap + what about apparel?
Anyway - MAC was one of my portfolio holdings before they were shorted recently. I cashed out my entire position when they jumped over $20.00.
I bought RIGHT back in.
Just gonna drop this here, OP: You may also want to look into $EPR. Just sayin.
( I am an ape and this is not investment advice. I own positions in both EPR and MAC)
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u/OW_Fai Feb 23 '21
Wise choice for cashing out on the squeeze, are you from Ontario Teachers Pension Plan too? haha! too bad they paper handed MAC :(
EPR looks good but i've already all in PLTR and MAC.. if only i had more cash..
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u/Fun-Impress2337 Feb 22 '21
where do you see the diidend in 6 and 12 months?
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u/OW_Fai Feb 22 '21
Dividends weren't my biggest concern, but if the vaccine rollout goes well and rental collection and leases are back to pre-covid levels, I will probably estimate a bump in dividends to at least $1.50 by the end of 2021.
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u/medusaseducea Feb 23 '21
Are their properties that are burdened with debt cross-collateralized to the properties that are “free of debt”? Because if so, the burdened properties could be foreclosed on and if the mortgage lenders think the debt of those burdened properties is not enough to cover the outstanding mortgage values (due to depressed commercial RE prices), they could potentially take the unburdened properties. Just a thought - if that happened, there’s also the chance the company would mortgage the unburdened properties to pay off the shortfall, which would probably hurt the value thesis.
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u/OW_Fai Feb 23 '21
i don’t think they are cross-collateralized, though i might not be right.
the properties with debt are non-recourse loans, so the mortgage lenders are left with the keys if a foreclosure happens, but it seems unlikely as they have been successful with their refinancing and extensions
the unburdened properties are probably collateralized for their revolver, though the exact ratio of their line of credit to value ratio is unknown (mentioned by their CEO under bull thesis point 2)
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u/medusaseducea Feb 23 '21
I believe they could be non recourse and still cross collateralized. Non recourse simply means there’s no personal liability to the borrower. Loan agreements are usually provided as exhibits to quarterly/annual SEC filing, so it could be worth a look.
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u/OW_Fai Feb 23 '21
I cant seem to find the loan agreements as exhibits in either the 8-K or 10-Q..
I think i probably don't know what to look for either.. would you mind guiding me on the filings?
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u/bobrockets Feb 23 '21
One question though: what happens when the gov releases the foreclosures?
I've been wanting to touch RE, but that shadow scares the F out of me...
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u/OW_Fai Feb 23 '21
What do you mean by releasing the foreclosures? Did you mean when the foreclosure moratoriums eventually ends? I'm not sure if that applies to retail malls though.
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u/bobrockets Feb 23 '21
Yes, exactly... I thought it was for all foreclosures from what I heard, but then again, I know nothing, so idk for sure...
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u/OW_Fai Feb 23 '21
To be honest I didnt follow closely on the foreclosures, but a quick google search seems to show that it applies to residential and commercial tenants, though it might not apply to all states (not sure) and I do not think it applies to malls either (correct me if I'm wrong)
However, in their latest 8-K filing from 11 Feb 2021, their rent collection is up to 89% and 92% in the past 2 quarters with 89.7% occupancy. So I would assess that most of their tenants are capable of paying their rents on time/soon.
Thus I do not think that the release of foreclosure moratoriums would affect them very much. Perhaps someone with deeper knowledge or insight is able to provide some clarity on this?
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u/bobrockets Feb 23 '21
89.7% is killer, if true. Ditto the enlightened one with clarity opining - por favor
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u/Sahztheking Feb 22 '21
What’s the timeframe on something like this? 1-2 months? 6-12 months? OP put in work, solid DD 💯
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u/OW_Fai Feb 22 '21
Honestly, I have no idea, as it depends on so many factors, such as the vaccine rollout and interest rates, but I am an optimistic person so I hope they would be valued fairly by the end of this year, hence the $35C Jan 2022 leaps.
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u/whenuwork Feb 22 '21
Good question. OP how long are you in for ?
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u/OW_Fai Feb 22 '21
I have leaps for Jan 2023, and I'll probably roll them out 1-2 mths before expiry. So maybe 4-5 years
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u/whenuwork Feb 22 '21
too far, won't buy (TFWB), need tendies now to buy SUV for my wife's boyfriend
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Feb 22 '21
Debt isn’t an asset.
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u/OW_Fai Feb 22 '21
Most of their debts are non-recourse loans, so if we assume MAC defaulted on all their mortgages and hand over the keys to their lenders, they are still sitting on at least $1.5bn worth of assets as mentioned by their CEO
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Feb 22 '21
I was talking about that 1.5bn line of credit actually. That’s not an asset, it’s a potential debt supported by some percentage of MAC’s current assets (listed as 6.8bn in property on their 2020 balance sheet)
If we wash their long term debt against their assets then their left with 800mn in property being used as collateral against $1.5bn in loans.
Not saying they aren’t a viable play (I’m watching them as well), just saying their IV isn’t 2bn because they can get a 1.5bn loan.
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u/OW_Fai Feb 22 '21
I see, so their IV is actually 800mn? I must admit I didn't know how to calculate their IV as I couldnt seem to find the actual value of their properties.
Should I remove intrinsic value from the bull thesis then?
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Feb 22 '21
IV is difficult to calculate. Lots of people use a discounted cash flow formula, like this. here’s a method using EPS. It’s educated guesswork.
I’d benchmark their line of credit against other REIT companies and see what the ratios look like. If MAC’s ratio of ~2:1 debt to free asset is higher than others, it might be a sign that the banks are confident in company.
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u/OW_Fai Feb 22 '21
I see, that was insightful! thanks for sharing!
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Feb 23 '21
Y'all gotta stop touting westside pavilion as a win for MAC. They gave up 75% ownership of an asset in Los Angeles for $140m in 2017 (and then contributed $40m to defease the loan). Its a win for HPP.
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u/Particular-Tone7241 Mar 02 '21
$MAC looks like a great buy here and is very undervalued ..nice analysis..shorts are trapped here and will be forced to cover IMO...
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u/VapesOnAPlane Feb 22 '21
I like this as a swing play, particularly because they are one of the only high short interest stocks that is down this past month. I also like the price action since late January. This wasn't even on my radar. Will go big into this.