Macerich Go-Forward Plan

Photo by Zac Wolff on Unsplash

Macerich (MAC) just announced their Go-Forward Plan. This is no surprise thanks to their recent replacement of long-time CEO Thomas O’Hearn with Jackson Hseih, most recently the very effective CEO of Spirit Realty Capital post-spinoff. Here is my quick take.

MAC has been a poor place to invest for years, despite their great properties. One reason was high debt. Management disrespect (in my opinion) for shareholders was another. So what is happening?

Details may be seen here. Key elements:

• Deleverage to low-to-mid 6x range, from current 8.8x.

• Restructure portfolio

• Improve internal processes

• Deliver “clean FFO/sh launch point of $1.80/sh over the next 3 to 4 years,” which is no growth but at least not a shrinkage on net.

• Get in position to go on offense, not possible for the past many years.

There are lots of details. The expanded asset ranking criteria strikes me as very Jackson Hsieh, from Spirit. [Note: FFO is Funds From Operations, as standard but still flawed measure of earnings for REITs.]

Key to leverage reduction:

• NOI growth, 1x

• Asset sales and give backs, 1x

• “Opportunistic” equity issuance, 2/3x.

The equity issuance will be about a 30% dilution. This could be much worse.

In the presentation they rank their assets. They see 8 as being Fortress assets or those with Fortress potential. Another 21 are “Steady Eddy” assets, stable and well positioned cash flow generators.

And 14 are “Eddies”, described as “Contributes cashflow to support company objectives but warrants limited capital investment based on underlying debt or ownership structure, or lower performance metrics.” They show performance numbers excluding the Eddies, which would have 15% less Net Operating Income (NOI).

Asset sales and give-backs on net are expected to reduce debt by $2B out of a current pro-rata total of $7B. (Note that consolidated debt is misleading here.) They expect these transactions on net to add $450M to $500M of liquidity.

They note that leasing is going historically well. They expect their six best assets in the East to drive $65M of NOI growth (25% of total) over the next four years.

However, their plan to end up where they are now at FFO/sh requires two areas of growth. They project growing EBITDA by about 25% on net, after the asset reduction, from it’s 2023 value. They also project growing NOI by development, from its post-dispositions value, by about 11%. Over four years these numbers strike me as aggressive but not crazy in the present retail environment.

The document says nothing about the dividend, which after all is up to the Board and not management. They have been paying 39% of FFO/sh, which is likely close to the legal minimum (of 90% of taxable income).

If all the reductions in FFO/sh shown on their bridging table happened before any of the gains, the likely dividend reduction would push 40%. But more likely is that it will end up in the 20% ballpark, coming back to the current value whenever they get back to $1.80/sh of FFO.

After that, they likely will grow the dividend back toward the 60% of FFO/sh that is typical of Simon Property Group (SPG). This would be a 50% increase, but would likely take several years at least.

Their properties on net are solid at root, and the company is now well-managed. Still P/FFO ratios mislead as they do for SPG, because of high costs not taken out of FFO.

The stock is now priced at 22x the current dividend. This IMO is pricing in a positive future already.

Even when (and if) the dividend gets up to $1.08 (60% of $1.80), the current price will be about 14x that dividend. That is not a cray multiple to think about, although the actual, sensible multiple will in part reflect what interest rates do.

But getting there will take at least four years and more likely 6 to 8, if things go well. I’m cheering for progress here, but MAC remains an avoid. [I would get interested around $8.]