Mall real estate investment trusts (REITs) were severely harmed by the economic closures imposed to contain the coronavirus outbreak. All of the main mall REITs ended up lowering their payouts as a result of mall closures, bankruptcies, and other events. With a highly coveted portfolio, Macerich (MAC 3.50%) was not exempt from the suffering.
Income investors could find this REIT’s 6.8% dividend yield alluring now that malls are starting to revive. Take a closer look at the balance sheet before you sign up.
As the epidemic period has ended, it is difficult to declare any of the major mall REITs winners. However, Macerich, Tanger Factory Outlets, and Simon Property Group (SPG 1.81%) stand out as three extremely distinct survivors. Both Macerich and Simon place a strong emphasis on upscale malls, which frequently serve affluent areas with sizable populations. Although Tanger has an exclusive focus on outlet malls, it also frequently owns properties that are in prime locations.
Even though it wasn’t pleasant for any landlord, the epidemic actually helped the higher quality malls because it accelerated the process of culling that had been gradually lowering the number of lesser quality malls. This essentially made the existing malls more crucial for shops and customers, who now have fewer options.
Malls that are extremely profitable have stood out in particular. For non-anchor tenants of Macerich’s properties, sales per square foot in 2022 were a satisfying $869, up from $801 before the epidemic. The superiority of Macerich’s portfolio is demonstrated by the fact that, in 2022, the market leader Simon’s sales per square foot came to $753.
And yet, over the past year, Simon’s shares have lost “just” about 15% of their value while Macerich’s price has fallen by about a third. Why then do investors seem to choose the mall REIT with the less successful malls?
Leverage is important
Here, the main plot is rather straightforward: Macerich, on the other hand, is not in a position to compete with Simon Property Group in terms of financial clout. Additionally, it is pretty obvious when comparing their balance sheets.
The financial debt-to-equity ratio for Simon is about 0.7 times, which examines debt in relation to a company’s whole market worth. The amount given by Macerich is 1.8 times higher than that. Due to the rising cost of debt refinancing and rising interest rates, this places the landlord in a much more dangerous situation.
Although its debt load increased during the early stages of the pandemic, Macerich is not ignoring the issue and has made significant efforts to lower it. Despite being more aggressive than Simon in terms of debt reduction, it began at a higher level of leverage and is currently at that level.
However, when examining Macerich’s capacity to pay its trailing-12-month interest expenses, problems may be most apparent. Simon’s interest coverage is a respectable 4.3 times, which gives it plenty of room for misfortune. With a times-interest-earned ratio of 0.6 times, below the critical 1 times level that denotes a corporation is just able to pay its interest charges, Macerich isn’t covering its interest payments.
The fact that Simon’s 6.5% dividend yield is only little higher than Macerich’s 6.8% yield may be the most intriguing aspect of this. Financially speaking, Simon is in much better shape than he is, so it appears like owning Macerich isn’t worth the risk. If you’re considering Simon Property Group as an option to this mall REIT, you should do so strongly.
I hope now you have an answer about Why Is Macerich’s Dividend So High?