Macerich (MAC -2.14%) offers investors an attractive dividend yield of roughly 5%. That's well above the 1.63% from an S&P 500 index fund and the 3.5% from the average real estate investment trust (REIT), using the Vanguard Real Estate Index ETF as a proxy.
But how is Macerich, a mall-focused REIT, actually doing compared with its pre-pandemic performance and versus its main rival, Simon Property Group (SPG -1.03%)? Let's take a closer look at Macerich and why the dividend is high and whether this REIT stock is worth a closer look.
Macerich's business is not quite back to normal
Macerich owns or has an interest in a collection of 44 very high-quality malls. Even the best malls were shut down in 2020 as governments around the world tried to slow the spread of the coronavirus.
It would be an understatement to say that 2020 and 2021 were difficult years for Macerich. The REIT cut its dividend in 2020 to ensure it had enough liquidity to survive through the uncertain period.
Image source: Getty Images.
It has been a slow crawl back, with the dividend starting to grow again in late 2022, rising from the reduced level of $0.15 per share per quarter to the current $0.17. That's a sizable 13% jump, but the dividend remains well below the pre-cut level of $0.75 per share per quarter.
From an operational standpoint, Macerich's story is mixed. Its tenants generated sales of $869 per square foot in 2022, up from $801 in 2019, before the pandemic. That's good news, though inflation likely played a role in the rise.
Average rent per square foot stood at $63.06 in 2022, up from $61.02 in 2019. However, occupancy is only at 92.6% compared to 2019's level of 94%, a difference of 140 basis points.
All in, the takeaway is that Macerich's malls are doing OK, but it is still working back from the abyss on the occupancy front, which partly explains the relatively high dividend yield.
How's the other guy doing?
Simon Property Group, Macerich's main REIT competitor, also cut its dividend in 2020 for the very same reasons. But Simon's dividend cut wasn't nearly as deep, going from $2.10 per share to $1.30, a drop of 38% compared to the 80% dividend haircut at Macerich.
A key reason for the difference is that Macerich's leverage is much greater than Simon's and has been for a long time. In fact, even today, Macerich's financial-debt-to-equity ratio of 2.5 times is well above Simon's 0.7.
Simon's stronger balance sheet, meanwhile, helps explain why its dividend has increased six times since it was cut. The current payment of $1.80 per share per quarter is still below the pre-cut level, but not by nearly as much as Macerich's dividend. Clearly, Simon's shareholders have been better rewarded for sticking out the difficult recovery period.
As for operating performance, Simon's tenants reported sales per square foot of $753 in 2022, up from $693 in 2019. The mall REIT's base rent, meanwhile, was $55.13 per square foot, up from $54.59. So far, the trends between Simon and Macerich are roughly similar. But Simon's occupancy stands at 94.9%, which is only 20 basis points off of the 95.1% that it achieved in 2019. That is a far better occupancy recovery than Macerich achieved.
All in all, Simon appears to be in a better position financially and business-wise. And that has accrued to shareholders in the form of a more robust dividend recovery. And yet Simon's yield is 5.7%, materially higher than what investors are collecting from Macerich. What gives?
The answer is really that the shares of both Macerich and Simon plunged during the early days of the pandemic, and they have recovered as the world has learned to live with the coronavirus. In fact, Macerich's stock has outperformed Simon's over the past six months, with a particularly strong showing, relatively speaking, so far in 2023 as investors get more comfortable with the company's turnaround. What hasn't kept pace is Macerich's dividend recovery, so the yield is lower.
Two ways to go
For conservative dividend investors looking at Macerich, it would probably be a better bet to shift your attention to Simon, which appears to be further along in its recovery efforts, has a stronger financial foundation, and offers a higher yield.
But for more aggressive types, Macerich likely has more upside potential with its dividend. There's no way to predict when, or even if, additional dividend increases might materialize, but as the REIT's business continues to recover (and the balance sheet strengthens), management will very likely try to win back investors with a higher payment. That said, given the lower yield, it appears that investors might already be pricing a higher dividend into the stock.
