Macerich (MAC -2.14%) recently increased its dividend by a hefty 13.3%. Although nice to see, the hike came well after its most notable mall real estate investment trust (REIT) peers returned to dividend growth. But, like Simon Property Group (SPG -1.03%) and Tanger Factory Outlet Centers (SKT -1.42%), Macerich's hike is unlikely to be a one-time move. Here's why Macerich can keep the dividend increases going.
Great properties
Simon Property Group is the 800lb gorilla in the mall space, with a global footprint of over 200 enclosed malls and factory outlet centers. Tanger, as its name suggests, is focused exclusively on a modest portfolio of 37 factory outlet centers in the United States and Canada. What sets Macerich apart is that it operates 44 properties that are, largely, high-performing enclosed malls.
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Notably, the company's properties produced sales per square foot of $877, looking at stores with 10,000 square feet of space or less (which basically excludes anchor tenants). By comparison during Simon's third quarter 2022 earnings conference call the REIT reported sales per square foot of $749. Because of Tanger's strict focus on outlets sales per square foot is much lower and not really comparable, but the general idea is that Macerich owns a focused portfolio of high performing properties.
That, of course, didn't matter during the early days of the coronavirus pandemic when non-essential businesses were shut down. And all three of these mall REITs either trimmed or eliminated their dividends in an effort to preserve cash. It was, without question, the right move in a very uncertain time. The big problem with Macerich, for dividend investors anyway, has been that Simon and Tanger returned to dividend growth much earlier.
Leverage issues
The issue clearly wasn't Macerich's property portfolio, which is industry leading. It was the fact that Macerich was carrying a lot more leverage than its closest peers. To put a number on that, the REIT's debt to equity ratio is currently around 2.5 times compared to roughly 0.96 times for Tanger and 0.86 times for Simon. Leverage can enhance returns in good times but it can also make muddling through hard times much more difficult.
MAC Financial Debt to Equity (Quarterly) data by YCharts
Dealing with leverage has been top of mind for Macerich's management team as it has also been working hard to ensure its malls remain industry leading. Enclosed malls in particular require material capital investment if they want to stay fresh and relevant for consumers. With the recent dividend increase, Macerich is signaling that it is on a stronger track. Notably, the debt to equity ratio, while still elevated, is down from roughly six times in early 2020.
It's also important that the company's business is practically booming today, with improving occupancy, strong leasing activity, and rising rents. During Macrich's third quarter 2022 earnings call management basically stated that it doesn't see a material slowdown in the business' positive momentum even though there are broad concerns about an oncoming recession. Funds from operations (FFO) for the third quarter came in at $0.46 per share while the new dividend is set at $0.17 per share per quarter. That translates to an FFO payout ratio of just 37%. That's quite low for a REIT and means there's still plenty of dividend upside even if the mall landlord was to see performance stagnate or fall a little.
Simply put, now that Macerich is more comfortable with its leverage situation the dividend is highly likely to keep moving higher. Don't go in expecting regular double digit hikes, but it appears this mall REIT sees much smoother sailing ahead.
A new option
Up until this point (a return to dividend growth), it has been hard to look at Macerich as a strong investment candidate in the mall REIT space. Now, however, conservative income investors can again comfortably start to include the company in the opportunity set. That said, Simon remains the best all around option given its diverse portfolio. Tanger's focus makes it appropriate for those seeking to focus on the outlet niche. But for those looking for a REIT focused around enclosed malls, Macerich, and its generous 5.5% dividend yield, is finally worth a deep dive.
