If you're shopping around for a retail play, after the rare, good news on Friday for the sector, then I might have a covered called idea to sell you.
The June retail sales report came in higher than expected and the July University of Michigan Consumer Sentiment reading came in slightly above the consensus. That makes the sector a bit more attractive, after I have been heavily underweight in retail since the back half of 2021. Surging inflation has seen the average consumer losing buying power for 15-straight months.
For this weekend's covered call idea, I'm playing with the high-yielding retail real estate investment trust, Macerich Company (MAC) . This REIT has ownership interests in 44 regional town centers and five community shopping malls totaling about 48 million square feet of gross leasable area. Much of that space is located in California, Arizona, and the Northeast, as Macerich specializes on well-located, top metropolitan coastal areas that have the potential to dominate with top tenants like Best Buy (BBY) and Signet Jewelers (SIG) .
The company remains highly leveraged, but has sold off eight underperforming properties and reduced debt by $1.7 billion in fiscal 2021. The current debt service coverage is a healthy 2.7-times. Occupancy rates have rebounded from the pandemic lows and now stand around 92%. In addition, management is repurposing some of its space to add living and working options to drive greater foot traffic.
The stock traded over 20 bucks a share in late 2021. But the onset of surging inflation, higher interest rates, and subsequent fears of a recession have cut the shares by more than half since then. In short, a lot of bad news seems priced into the stock and outside a major recession, the stock appears oversold. During the last quarterly earnings report, management upwardly revised its fiscal 2022 funds from operations estimate from a range midpoint of $1.95 a share to $1.97. The means this REIT is trading for less than five times FFO.
The REIT also yields 6.6% currently and the company is expecting to generate over $230 million in free cash flow after its dividend payouts in fiscal 2022. The CEO seems to be signaling the shares are undervalued, given he added more than $1 million to his holdings in June.
This is how I have started to accumulate a position in MAC via covered call orders. Using the January $9 calls, fashion a covered call order with a net debit in the $7.70 to $7.80 a share range (net stock price - option premium). Options provide solid liquidity, and the order should fill quickly. This strategy provides downside protection of in the high teens including dividend payouts and potential upside of right around 20% including dividends over the option duration, even if the stock does nothing.