Macerich

Moat: 1.5/5

Understandability: 1/5

Balance Sheet Health: 1/5

Macerich (MAC) is a Real Estate Investment Trust (REIT) that owns, operates, and develops Class A malls primarily in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Macerich’s core business involves owning and operating regional shopping malls, targeting high-end and established markets. They focus on “urban and infill” properties, often located in areas with significant population density, and they typically cater to affluent demographics.

Revenue Distribution

Macerich generates revenue primarily from rental income collected from tenants within its properties. This revenue stream is largely determined by base rents, percentage rents (based on tenant sales), and other fees. A breakdown of recent revenues:

  • Rent revenue: forms the lion’s share of MAC’s revenue, with the total revenue being driven by the base rent which is usually a fixed amount set in lease agreements.

  • Ancillary revenue: such as short-term leasing, advertising, parking, and other ancillary services also contribute to the overall revenue. However, the amount of this revenue is minuscule in comparison to the rent revenue.

The retail industry has undergone a major transformation, particularly in the mall sector. These changes are noteworthy:

  • Shift Towards E-commerce: online retail has gained significant popularity, impacting sales within physical stores. This shift has been accelerated by the increase in digital access and consumer preferences.

  • Changing Consumer Preferences: Consumers are increasingly seeking experiences and entertainment options rather than pure shopping opportunities, which is leading malls to diversify their offerings.

  • Declining Foot Traffic: The decline in visits to malls have strained the financial performance of many traditional shopping centers. This has created issues with leasing occupancy and the revenue generated from leases.

  • Rise of Mixed-Use Developments: Many malls are adding residential, office, and entertainment facilities, to create greater traffic and value and to try to keep up with times.

  • Increased Competition: From alternative shopping locations and direct-to-consumer retail strategies by the brands, are putting pressure on the businesses of malls.

Competitive Landscape

  • Diverse competitors: Macerich faces competition on several fronts. First is from rival mall operators, with the major players being Simon Property Group and Brookfield Properties. Second, new kinds of retail offerings are becoming popular, such as power centers, lifestyle centers, and online retail. Third, the shift to experiential offerings at malls is putting pressure on malls to diversify their offerings which require massive investments.

  • Differentiated locations: A differentiating factor amongst malls is the locations they target. Most malls will be geographically targeted with some targeting high traffic, suburban, urban, and other areas.

What Makes Macerich Different?

Macerich distinguishes itself by:

  • Premium portfolio: It focuses on well-located Class A malls in urban and densely populated areas. These malls tend to attract high-end retailers and offer some protection from economic downturns.
  • Development and Redevelopment: The company has a focus on redeveloping existing properties.
  • Tenant mix: Macerich is focused on curating a specific mix of high-end and desirable retail brands, a well-performing balance of department stores, lifestyle tenants, and restaurant and entertainment venues, all to improve the overall appeal of the mall.

Financials

Revenue and Margins

  • Revenue: Macerich’s revenue is primarily derived from rental income from its high-end Class A malls. The total revenue is highly dependent on the occupancy rates and the economic environment.
  • High expenses: Operating expenses, depreciation, and the interest costs from debt are very high for Macerich.
  • Low net margins: As a result, while Macerich has reasonable operational profitability, its net profits are quite low and susceptible to interest rate risk.

Recent Performance

  • Declining FFO: Macerich has posted declining funds from operations, particularly during the last recession where it fell from $1.68 per diluted share to $0.34 and even further. It indicates that the company’s profitability is still not at par.
  • Increased interest rate risk: Like many other REITs, rising interest rates will significantly affect MAC’s financials, specifically the interest expense and the debt repayments.

Balance Sheet Health

  • High Debt: Macerich has a very high debt load, and the debt has a significant portion of variable interest debt, increasing the risk of higher interest expense, which can destabilize the business.

  • Low equity: Macerich has a very low equity when compared with the debt, causing a significantly higher leverage.

  • Unfavorable liquidity position: MAC has very little cash when compared with the large amount of debt it has, therefore, the liquidity position is extremely strained and if a crisis occurs, the company will struggle to meet its obligation or survive.

Moat Analysis

The “moat” in the investing world is used to describe a company’s sustainable competitive advantage that makes it hard for competitors to challenge it. The “moat” will determine how safe your investments are as well as the future potential of any business, as businesses without one have little long-term value. For Macerich, its ability to sustain returns on capital and long-term profits are questionable.

  • Limited intangible assets: Macerich has a brand that has some popularity within the high-end retail space, but nothing that sets them apart.
  • Low switching costs: Malls have very little to no switching costs for its visitors. A consumer can switch between malls in less than a few minutes if they want to and not lose any personal information, and usually no fees.
  • No cost advantage: Macerich has no discernible cost advantage, since they are at the mercy of their suppliers, construction companies, and material costs.

Given the low switching costs and limited defensibility, and the high risk from the business, I will give Macerich a moat rating of 1.5/5.

Risks to the Moat

  • E-commerce threat: The transition to digital retail can hurt Macerich’s occupancy and revenue.
  • Economic recession: A major economic downturn can significantly impact consumer spending, decreasing retail foot traffic and sales.
  • Interest rate risk: Due to high debt levels and a significant amount of it having variable interest rates, an increase in rates can make it hard to meet its debt obligation. This would result in a downgrade in credit ratings and would make new borrowings more expensive, which would severely destabilize the company.
  • Changing Consumer Behavior: If consumer tastes change, and malls can’t adapt, the consumer traffic could decline.
  • Technological Disruption: New technologies can further improve shopping in different kinds of locations (like online or mobile), further harming the traditional brick and mortar malls.

Business Resilience

  • High debt: The high debt levels leave little leeway in the event of economic difficulties. The high debt-to-equity ratio signals a risky business.
  • Low profits: The current profit levels are not that impressive, and leave very little cushion for a tough time, creating further downside risk.
  • Competetive market: The market is also very competitive with constant new innovations that are a threat to all companies.

Considering all these challenges, Macerich’s business has a very low rating on resilience, and a major risk of becoming insolvent in the event of a protracted downturn.

Understandability

Macerich’s business model is easy to define but complicated to predict or model. While the core concept of a REIT that earns from rent is easy to grasp, there are a number of moving parts and financial complexities that make Macerich hard to value, which leaves it difficult to see how they may perform in the future. This makes its understandability a 1 / 5.

Recent Concerns and Controversies

  • Rising interest rates: As discussed previously, Macerich is very susceptible to interest rate hikes.
  • Occupancy pressure: While occupancy has been stabilizing, there is no guarantee that the rates will be high enough to compensate for reduced foot traffic.
  • High debt load: The debt burden continues to be extremely high, which could prove to be a risk to the long-term viability of the business.
  • Changing consumer trends: The company faces problems in meeting new consumer preferences, which are focused on experiences and not just retail purchases.

In earnings calls, Macerich management has noted its focus on bringing in new tenants, investing in experiential retail, and working to improve performance. They have also focused on reducing debt, but these efforts have been slow and haven’t yielded great results. They believe that their properties are located in ideal places with a higher consumer affinity that will allow them to regain their previous sales. Despite these assurances, the challenges of the business, from its business model to its financials remain high.