The Macerich Company (NYSE: MAC) is a real estate investment trust (REIT) focused on managing luxury malls in the United States. Like the rest of the retail sector, Macerich's stock has been under pressure in recent years. A combination of increased competition from e-commerce and high debt levels has pushed many retailers to close stores and some to file bankruptcy.
Macerich isn't as vulnerable as your run-of-the-mill mall operator because it focuses on high-end luxury malls, which have continued to show strong financial performance.
As the company's stock price has fallen, its dividend yield has risen. Today, Macerich's dividend is approaching 10%. Is this a good value for investors, or is this high yield at risk of being cut?
Macerich's balance sheet
Because it is a property REIT, Macerich's balance sheet can be difficult to navigate. When the company develops malls, it will generally take on mortgage debt at the property level instead of using bonds at the corporate level like most companies. The benefit of doing this is that Macerich can secure lower interest rates by collateralizing its property against its debt. The company's average effective interest rate is approximately 4%, which is quite low. The downside is that the company has dozens of debt securities outstanding that can be tough to decipher from the outside looking in.
As of June 30, 2019, Macerich had $5.6 billion in total debt. On the other side of that equation, the company has generated $620 million in EBITDA over the last 12 months. That would imply that the company's ratio of total debt to EBITDA is approximately 9.0.
The debt-to-EBITDA ratio appears high compared to that of a conventional company. However, it's important to remember that REITs do not have to pay taxes at the corporate level due to a quirk in the tax code. Also, Macerich has financed its debts at low rates. The combination of these two factors enables the company to take on more debt than another company without those advantages. It's also worth noting that other property REITs with investment-grade credit ratings like Simon Property Group and Taubman Centers have similarly high leverage ratios.
In summary, Macerich has a heavy debt load and a complex debt structure. However, based on the low interest rates at which it has been able to finance itself and its ability to generate more cash flow by avoiding a layer of taxation, the debt load appears to be manageable.
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While balance sheet strength is important, the best indicator of whether a company can sustain its dividend is how well that dividend is covered by business cash flows.
In the world of REITs, funds from operations (FFO) is commonly used as a proxy for operating cash flow. FFO starts with net income and adds back nonrecurring items and noncash charges. However, FFO is a non-GAAP metric and can differ significantly from the figures shown in the cash flow statement.
As can be observed from the table below, FFO is significantly higher than operating cash flow. This is because Macerich operates a number of its properties as joint ventures with other real estate companies. Per accounting rules, these joint ventures are unconsolidated and show up in a different part of the cash flow statement. In 2018, Macerich received $355.4 million in net dividends from its joint ventures; adding that amount to operating cash flow of $344.3 million gets within the ballpark of what the company reported as FFO. For the purpose of this analysis, we will use the company's reported FFO as the better proxy for cash flow.
|Macerich Financials||2017||2018||Last 12 Months|
|Operating cash flow||$386.4 million||$344.3 million||$344.5 million|
|Funds from operations||$582.9 million||$564.4 million||$570.8 million|
|Total dividends paid||$443.8 million||$453.6 million||$459.9 million|
Data source: Macerich financial reports, Capital IQ.
Based on Macerich's FFO, its dividend is well covered. FFO exceeded dividend payments by more than $100 million for each of the last two years. Of course, the company may have other expenses not factored into FFO -- most notably capital expenditures for new developments. The important thing to note here is that new projects are generally funded by debt and can be very lumpy, making them hard to use and somewhat unreliable for analyzing the dividend's safety.
The dividend checks out
An analysis of Macerich's balance sheet and cash flows suggests that the company's high dividend yield is sustainable for now, but the margin of safety isn't terribly large. Macerich does have a huge pile of debt, and its dividend payments exceed 75% of cash flows before capital expenditures.
However, these financial characteristics are by design. REITs are required to pay 90% of their earnings via dividends in order to maintain their tax-advantaged status, and real estate is most cost-effectively financed by cheap mortgage debt.
The company will only face issues if it sees its cash flows meaningfully decline, but the last two years have seen relatively stable cash flow generation as measured by FFO. This is mostly due to the relatively strong performance of Class A luxury malls compared to lower-quality malls. Should Class A malls be impacted by the retail apocalypse, Macerich, too, could run into trouble.
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