Macerich: My Play on Shopping Malls

Around February, I started looking into Macerich, which is a real estate investment trust (REIT). Its business model is fairly simple. It owns shopping malls across the United States, rents out the space to tenants whom pay rent, and pays 90% of its taxable profits through dividends.

At first, I was a bit apprehensive about the stock. The news talks about the retail apocalypse with Amazon putting shopping malls out of business - 1 in 4 malls is set to close in the next 5 years. I also prefer to do most of my shopping online because it is more convenient. In addition, COVID has significantly impacted brick-and-mortar in 2020. Macerich is no exception, having to close its malls for an extended period of time.

These two events have weighed into Macerich's 2020 results, cutting its dividend from $3 in 2020 to $1.15 in 2021. Overall, these facts present a fairly pessimistic outlook on Macerich's future.

My perspective on Macerich's future started to change as I dug deeper. First, not all malls are created equal. Malls are typically graded from A to C. Class C malls, the bottom of the barrel, are often on the brink of bankruptcy as they have higher vacancy and lower-quality tenants.

Macerich's malls fall into the Class A+, A and B+ categories. These malls are also in great demographic areas. Macerich's malls have the highest population density of its competitors, and the median/average household income is >$80K.

In addition, by the time I started looking at Macerich, its malls had started to stabilize due to the COVID impact, with net occupancy around 88%.

Armed with these facts, my thesis was that as people get vaccinated, they will return back to malls for entertainment and shopping. The best shopping malls will see a rebound in traffic and earnings as they're located in areas of high population density and income.

If this thesis plays out, I believe Macerich will be worth about $30 - $40 by the end of 2023. As cash flow returns closer to 2019 levels, Macerich will adjust their dividend closer to $1.5 - $2. I'm also assuming investors want a ~5% dividend yield.

So far, Macerich has done well - my average cost was $13, and the stock is currently around ~$22, which is a 70% return-to-date.