I'm Still Mall Shopping -- This Time a Little More Aggressively
I wrote on Tuesday about Simon Property Group (SPG) , perhaps the most conservative way to play shopping mall operators. Now, I'm moving down the quality curve a bit to Macerich (MAC) , an industry competitor. MAC stands to give you even larger gains than can be expected from Simon.
Back in 2015, MAC was flying high enough to rebuff a takeover offer from SPG at a final bid of $95.50 per share from a previous offer of $91.
That refusal to sell proved to be a very poor decision. MAC never got higher since and actually dropped briefly to south of $5 during the worst of the Covid-panic in March 2020.
Operations were ordered closed during the first few months of the pandemic causing Funds From Operations (FFO) to plunge from $3.54 to $2.16. In response, management cut the dividend from $0.75 quarterly to $0.50 and then to $0.15 where it still sits today.
Macerich got through those scary times and appears well on its way to a longer-term recovery.
FFO is likely to rise a bit in 2022 and beyond. Value Line's analyst sees $4 in FFO within three to five years. That would put the firm's distributable cash flow almost right back to its all-time record from 2016.
What is this real estate investment trust worth right now?
From 2012 through 2021, MAC's average P/FFO ran about 14.9-times. A normalized yield, excluding the anomalous year 2020, typically hovered around 4.5%.
Assuming a lower than average 13 multiple on 2022's FFO estimate suggests MAC could rebound to $25 - $30 by this time next spring.
A second metric, average premium to book value offers yet another way to evaluate MAC's potential. In the full decade ended Dec. 31, 2021 MAC typically sold for more than triple its book value. When SPG bid for it in 2015 they were willing to pay a 212.7% premium.
Value Line sees MAC's year-end 2022 book value as reaching $15.35. Even twice that, rather than three times, supports a potential share value of $30.70 over the next 12 to 18 months.
Those are pretty exciting, yet realistic price targets in the world I live in. That is especially true when you consider you're getting paid a 3.72% yield while you wait.
Note, too, that MAC touched a high of $26 in January 2021. It changed hands as high as $22.88 as recently as November last year. If MAC only reverts back to that November peak over a full year buyers at today's quote of $16.15 would have seen over 45% in total return.
I'm not alone in seeing extreme value here. Independent research from Morningstar calls MAC a 4-star, out of 5, buy. Its present-day, as opposed to year-ahead, fair value estimate for Macerich sits at $28.50.
Option traders can pocket very tempting put premiums via shorting Jan. 2024 expiration date puts at strikes from $13 to $20.
Actual pricing on those, with MAC at $16.15 on Tuesday, are shown below.
Margins of safety were extraordinarily high, running from 36.8% on the most conservative of the strikes ($13) to a still high 20.2% on MAC's deep-in-the-money $20 puts.
Sophisticated option players could set up the somewhat aggressive Jan. 2024 $20 buy write combination detailed below. The numbers represent the cash flow on a 1,000-share, 10-call and 10-put quantity. You could do the same percentage results with as low an 100-shares if you investment capital is more limited than my own.
Achieving the best-case scenario that follows would require an almost 24% gain by the Jan. 19, 2024 expiration day. That is something I find quite likely to occur.
Amazingly, the mechanics of the buy/write could morph any move to $20 or higher, from a raw gain of 23.9% or greater into a 226.3% cash-on-cash return.
That annualizes at a very fine 125% in total return assuming no change in the current dividend rate.
What if MAC fails to reach and hold $20 by then? If so, the worst-case scenario detailed next would play out. Barring a major decline, however, even that is unlikely to inflict any pain.
You would end up with a double-sized position in MAC, but at an average net cost of just $12.70 per share. Any decline of less than 21.3% from the trade inception price would allow for immediate liquidation for at least a small, and perhaps a still very hefty gain if MAC was closer to $20 than not on Jan. 19, 2024.
Owning Macerich outright is a fine Plain vanilla way to go. Shorting puts is likely to be a winning hand. Setting up full buy/write positions as described above, or even utilizing more conservative strike prices, appears quite enticing.
Play Macerich whichever way suits your style. You will likely end up being glad you got "malled," rather than mauled.
At the time of publication, Price was long MAC shares, short MAC options