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Coverage Initiation: Macerich
Value Line has initiated coverage of The Macerich Company (MAC) in its flagship product, The Value Line Investment Survey. Macerich is a real estate investment trust (REIT) that owns regional shopping centers, focusing on densely populated markets. Among the company’s assets are Tysons Corner Center in northern Virginia, Washington Square near Portland, Oregon, and three properties in New York City: Queens Center, Kings Plaza Shopping Center, and Green Acres Mall, the latter two of which were acquired within the past nine months. Macerich has had its corporate headquarters in Santa Monica, California for more than 30 years. As of year-end 2012, it had more than 1,300 employees.
Macerich was founded by Mace Siegel in 1964 in Ames, Iowa. It had its initial public offering in March of 1994. The company made major acquisitions in 2002 and 2005 and has grown to the point where it became part of the Standard & Poor’s 500 index in May of 2013.
The company has various ways to grow. Internally, about 63% of its leases have provisions for annual rent increases tied to inflation. Spaces that are re-leased typically command a premium to the rent paid by the previous tenant. Furthermore, Macerich can add tenants to raise the occupancy rate. In all, when tenants perform well, so does the company. Externally, Macerich makes acquisitions from time to time, such as the aforementioned purchases of Kings Plaza and Green Acres. Sometimes, this means buying out the stake of a partner. The company also builds properties, such as Fashion Outlets of Chicago (a 530,000-square-foot center scheduled to open on August 1st near O’Hare Airport), and expands existing ones, such as Tysons Corner Center, which will become a mixed-use property with luxury apartments and a luxury hotel.
REITs rely on debt financing, so low interest rates are helpful in this regard. Equity offerings, such as one in May of 2013, are another means of financing the company’s growth. Macerich also sells noncore assets to enhance its portfolio and raise additional funds for reinvestment.
As a REIT, Macerich must pay out at least 90% of its taxable income as dividends. Accordingly, most REIT stocks have dividend yields that are above the market average and are attractive for income-oriented investors. Macerich stock has been yielding more than 3% of late.
Investors must be aware of some risks. Most notably, when consumer spending is weak, that hurts Macerich’s tenants—and the company itself. When the economy was in the depths of recession in 2008 and 2009, occupancy rates and sales per square foot fell significantly. In fact, dividends declined for three straight years before rising in 2012. Some anchor tenants, such as Sears (SHLD) and J.C. Penney (JCP), have been turning in weak results, and if shoppers are less willing to go there, that could hurt the rest of the mall. Macerich also doesn’t have a lot of geographic diversity. A significant proportion of its properties are in California, Arizona, and the New York metropolitan area. The company has little presence in the Midwest and almost none in the Southeast. Competition is another issue, as the United States is oversaturated with malls. Some of the company’s shopping centers have occupancy rates of well under 90%, and if Macerich wants to sell, it might not be able to find a buyer. Finally, the possibility of rising interest rates is negative for income-oriented equities such as Macerich.
For a more thorough look at Macerich’s business prospects, and the particular investment merits of its stock, subscribers should examine our full page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.