Morningstar - Winter 2019 - 55

A Solid Foundation
Macerich's Class A mall portfolio should support strong
earnings growth.
BEST IDEAS: EQUITY

Kevin Brown

Macerich MAC

This article is adapted from a Morningstar equity research report dated
Sept. 30, 2019.

Stats 09/30/2019

Macerich has successfully repositioned itself as a true owner and operator
of Class A regional malls. Over the past seven years, the company has
sold more than $4 billion in mostly lower-quality assets, either directly owned
or owned through joint ventures, and recycled the capital into acquiring
new Class A malls. As a result, the company's portfolio should produce higher
tenant sales productivity, occupancy levels, and rent, and is much better
positioned to face the headwinds of e-commerce. We expect Macerich to
continue improving its portfolio through redevelopment, opportunistic
acquisitions of surrounding properties for mixed-use development projects,
and asset sales, which should deliver strong earnings growth over time.
Macerich's moves to improve its portfolio quality were necessary to position
the company for the omnichannel strategy many retailers are pursuing.
E-commerce continues to pressure brick-and-mortar retail as consumers
increasingly shop online. Macerich exited the assets that are likely to
see falling sales growth and occupancy levels. Although many retailers will
look to reduce their store count over the next decade, the high foot
traffic and sales productivity of Class A malls that now make up Macerich's
portfolio continue to make them attractive places for retailers to place
stores. In addition, many e-tailers are beginning to open stores in the Class A
mall space as a high-quality physical presence provides a form of
marketing, a showroom for products they want to highlight from their online
stores, and another source of sales. While brick-and-mortar sales growth
might be below inflationary levels on average, we believe performance
will be bifurcated between the high-quality assets that Macerich now almost
exclusively owns and the low-quality assets that the company disposed
of over the past few years. As a result, Macerich should be well-positioned
to face the challenges in retail over the next decade.
We assign Macerich a narrow moat rating because of its portfolio of highquality well-located properties that produce its network effect and
efficient scale benefits. We recognize the pressure of continued e-commerce
growth on traditional brick-and-mortar retail and that the U.S. is significantly
over-retailed, but we believe that there will always be demand for highquality retail locations. Macerich's properties are in many of the best markets-
with dense populations and high disposable incomes-and are hard to

Morningstar Rating
QQQQQ

Sector
u Real Estate

Industry
REIT-Retail

Price
$31.59

Fair Value Estimate
$56.00

Uncertainty
High

Economic Moat
Narrow

Stewardship Rating
Standard

Market Cap
$4.2 Billion

Price/Fair Value 09/30/2019

$80
Fair Value Estimate Per Share
56.0

40

Month-End Closing Price

31.6
10/2016

10/2017

60

20

10/2018

replicate. Macerich's high-quality properties attract desirable tenants, which in
turn makes its properties more attractive to consumers and future tenants.
We are slightly reducing our fair value estimate to $56 per share from $57 per
share after incorporating first-half 2019 results and updating our internal
growth assumptions. Our fair value estimate implies a 5.9% cap rate on our
forward four-quarter net operating income forecast, 16 times multiple on
our forward four-quarter funds from operations estimate, and 5.4% dividend
yield, based on a $3.00 annualized payout. The occupancy, minimum rent
growth, releasing spreads and margin assumptions drive total company annual
same-store NOI growth averaging 1.9% across our 10-year forecast. We
believe that Macerich won't be able to add new mall assets to its portfolio as
most Class A malls are already owned by long-term investors but also won't
make any major dispositions. Instead, the company will improve the
quality of its assets and reposition them in their markets through continual
redevelopment and also selectively invest in development projects. K
Kevin Brown is an equity analyst with Morningstar Research Services.

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55


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Morningstar - Winter 2019

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