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Mall REITs Keep Crushing Expectations

Early this week, U.S. mall giant Simon Property Group reported a strong earnings recovery for the second quarter of 2021. On Wednesday, its smaller rival Macerich (NYSE: MAC) joined in. Macerich's impressive second-quarter results should remove the last shreds of doubt about the mall industry's ability to bounce back from the COVID-19 pandemic.

The recovery begins in earnest

In the first quarter, Macerich was still facing a fairly difficult year-over-year comparison. Additionally, the company booked $29 million of retroactive rent abatements for tenants that were unable to pay rent during the pandemic. As a result, adjusted FFO per share plunged 44% year over year on a 29% drop in same-center net operating income (excluding lease termination income).

By contrast, retroactive rent abatements decreased to $15 million in Q2 -- and just $5 million, net of bad debt reversals recorded last quarter. Meanwhile, Macerich boosted its occupancy rate by nearly 1 percentage point during the quarter, from 88.5% to 89.4%. It also booked gains on non-core land sales and some of its venture-capital investments in emerging retailers.

This enabled the mall REIT to post a 10.4% year-over-year increase in same-center NOI, excluding lease termination income, which reached $179.8 million. Moreover, adjusted FFO per share surged 51% to $0.59. Analysts had expected adjusted FFO per share of $0.43.

Stunning sales growth

Importantly, same-store sales for shops occupying less than 10,000 square feet in Macerich's malls surged past pre-pandemic levels last quarter. Comparable tenant sales rose 13.4% compared to the second quarter of 2019, including growth of around 15% in May and June. Even Macerich's long-suffering food and beverage tenants surpassed their 2019 sales levels beginning in May.

Image source: Getty Images.

This sales surge benefits Macerich in the short run via higher percentage rent payments. (Most non-anchor tenants in malls pay base rent plus a percentage of sales beyond a certain level.) That contributed to the big earnings beat last quarter.

The strong sales recovery will also help Macerich in the long run by making its malls even more desirable for prospective tenants. Sure enough, it signed 488 leases for 1.86 million square feet of space in the first half of 2021: up 18% in terms of deal numbers and up 34% in terms of square footage relative to the first half of 2019. And whereas Macerich had to sign new leases at lower rents than its expiring leases in the second half of 2020, the REIT delivered double-digit positive rent spreads last quarter.

The outlook grows brighter

In conjunction with the earnings report, Macerich increased the low end of its full-year FFO guidance by $0.05 per share. The REIT now expects to post adjusted FFO per share between $1.82 and $1.97 this year.

Notably, Macerich was able to increase its guidance despite issuing $116 million of equity since its last earnings report, which will boost its share count by about 3%. While the company's 2021 stock offerings have diluted existing shareholders, they are helping Macerich repair its balance sheet rapidly.

Furthermore, Macerich's forecast appears conservative. Even the high end of its guidance range implies that adjusted FFO per share will average $0.46 per quarter in the second half of 2021, down from $0.59 last quarter. The REIT has a good chance to generate higher FFO even without a repeat of the venture capital investment gains it booked in Q2, thanks to growing occupancy rates and the trend of strong tenant sales.

Over the next few years, Macerich should benefit from a continuing recovery in occupancy and the completion of various redevelopment projects, driving further growth in NOI and FFO. With shares trading for less than nine times the midpoint of the company's 2021 adjusted FFO guidance range, Macerich stock appears to have ample upside for patient investors.

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Adam Levine-Weinberg owns shares of The Macerich Company and is short January 2022 $25 calls on The Macerich Company and short January 2022 $30 calls on The Macerich Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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