The past year has been a struggle for the real estate investment trust (REIT) space. Rising interest rates have been a headwind, and many have yet to completely recover from hits taken during the COVID-19 pandemic. Retail REITs have been hit hard and are trading at some attractive dividend yields. Macerich (MAC -2.14%) is trading with a high yield -- is the dividend safe?
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Macerich focuses on town centers
Macerich is a REIT focusing on town centers in dense urban and suburban areas. The company focuses on areas with high population density and growth. About 88% of its centers are located on the West Coast, Phoenix, and the corridor between Metro New York and D.C.
Like most REITs, Macerich was beaten up hard by the COVID-19 pandemic and has yet to fully recover. From 2009 to 2019, the average occupancy was 94.6%. Occupancy then fell during the pandemic, falling to 88.5% in the first quarter of 2021 before rebounding to 92.1% at the end of the third quarter of 2022.
The consumer appears to be pulling back
The latest Personal Incomes and Outlays report from the government showed that personal consumption expenditures increased only 0.1% month over month in November, which was a decrease from the previous few months.
The Federal Reserve's policy of rapid interest rate increases has increased fears of a recession in 2023. Consumption is the biggest component of gross domestic product (GDP), and it looks like the rate increases are beginning to have an effect. We will get a better idea when we get December retail sales, but so far, it looks like consumption is waning.
Macerich has a decent amount of debt to refinance
As a general rule, REITs tend to be highly sensitive to interest rates. This is a function of borrowing costs, although many investors look at REITs similar to a fixed income investment and purchase based on dividend yield. The knock on Macerich has been its ability to extend or roll over maturing debt in the coming year. The conditions in the debt markets are relatively inhospitable at the moment, and many companies have to engage in extensions instead of maturities. In extensions, the companies push out the maturity date of the debt in exchange for a higher rate or a fee.
As of the end of September, Macerich has been able to refinance or extend about $580 million of debt maturing in 2022 with a weighted average closing rate of about 5%. The company expects to be able to extend $300 million worth of debt to 2025. Macerich has approximately $600 million of debt coming due in 2023 that it needs to roll over or extend. Including capacity on the company's revolving line of credit, it has about $615 million in liquidity, so it should be able to deal with the maturities. Funds from operations (FFO) for the past 12 months have been around $438 million, so liquidity is not a problem. That said, Macerich will be paying higher interest going forward. The company is paying over 7% on some of these extensions, which are based on the secured overnight financing rate plus a spread of 2.8%.
Earnings disappoint, but the dividend looks safe
In the third quarter of 2022, Macerich disappointed the Street with its numbers, and it cut its 2022 FFO guidance to a range of $1.93 to $1.99. This was a $0.02 decrease in the midpoint of the range. At current levels, Macerich is trading at 5.6 times the guided FFO per share, which is a cheap multiple. The company also has a dividend yield of 5.9%. Macerich raised its dividend recently from $0.15 per share to $0.17 per share. Macerich might have some struggles if the consumer pulls back, but the dividend looks safe for now.
