The Mall Is Where It's At

Before COVID struck, Macerich , a class-A mall operator formatted as a real estate investment trust, was doing just fine. From 2014 through 2019, its net operating income (NOI) growth was superior to that of its major competitors. MAC and those other mall operators were all forced to shut down during the height of the COVID-panic. That put a serious crimp in earnings and funds from operation (FFO). Shares were crushed as losses accrued. MAC chose to both cut dividend payments and issue new shares, at less than favorable price points, to fund the firm while waiting to get back to normal. Rumors of possible bankruptcy flew during the worst of the crisis yet corporate insiders were big buyers during February and March of 2020 at single-digit share prices. That showed their confidence that MAC would make it through and prosper again. Business conditions improved in the second half of 2020 and beyond. FFO per share are likely to have already bottomed out. The current 15-cent quarterly dividend appears poised to be raised during 2022. Non-core asset sales have been sold, generating cash, which has helped reduce debt. Repurposing of real estate and improving customer traffic have management feeling very optimistic toward the future. The graphic below reflects management's comments at their recent quarterly presentation. Survival is no longer an issue. Forward prospects are excellent and the market has noticed. Over the past year MAC shares are up more than 148% plus dividends. Last January's spike came as the Reddit Crowd successfully initiated a short squeeze. There are currently 12.21% of the outstanding shares sold short. Those traders are on the hook for hefty quarterly dividend payments. Long-term short sellers have been seriously punished. There is every reason to think a future squeeze could occur again. At worst, the short position represents extra ultimate demand for the stock. At best, it could result in another quick spike upwards. REITs are typically valued based on Price to FFOs rather than P/Es. The graphic below tracks MAC's history on that basis. Pre-COVID a normalized P/FFO for MAC ran about 17-times. As of late September MAC was available for just over 8-times its 2022 estimated FFO. Previous best buying opportunities in MAC (green-starred below) came at P/FFOs from 13.4-times to 15.6-times. Should have sold valuations (red-starred) occurred with MAC at 18.7-times to 25.2-times FFO. Assume just a partial reversion towards the mean valuation of 14-times next year's FFO and you come up with a 16-month target price north of $30. MAC's super-low price to book value premium also suggests the shares remain quite undervalued. Independent research house Morningstar assigns a 4-star, out of 5, buy rating to MAC. Like me, they see MAC's fair value as $30. Reaching Morningstar's goal price would deliver a stellar 73%, plus dividends, total return. Owning Macerich outright is the plain vanilla play here. You'll likely make solid gains while pocketing an excellent yield while you wait. Option traders with excess buying power in their accounts might wish to short some naked puts out to either Jan. 20, 2023 or Jan. 19, 2024. The graphic below showed actual pricing on MAC's LEAP puts at $15 and $20 strikes, with the shares at $17.35. Worst-case, forced purchase levels dropped to well under the trade inception price, providing up to 33.1% in downside protection. Premiums are generous and there's plenty of time for MAC to climb above $20, allowing for maximum profits for those selling in-the-money naked puts. Even after rebounding strongly MAC is still underpriced. Buy some shares, sell some puts or consider doing both.

The Mall Is Where It's At

Even after rebounding strongly, mall operator Macerich is still underpriced, here's how to play it.

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