Here’s a good tip: a mall operator

If one misconception has survived in recent years, it’s this: shopping malls are on the way out.

The huge indoor spaces that dominated much of 20th century retail grew mainly out of a tax code gimmick and the fact that they could offer indoor air conditioning at a time when few people had it. at their home. Once that allure wore off, the malls carried on largely through their own momentum and the inexplicable success of Hot Topic.

But in recent decades, malls have suffered from the rise of e-commerce and the general shift of consumers from the suburbs to the mixed-use streets of cities. At least, that’s what we were told.

So buckle up, because here comes Paul Price with a strong “buy” on the malls, or at least a trader in the space.

“When upscale mall operator Macerich (Mac) – Get Macerich company report reported last month, the news was all good,” Price recently wrote on Real Money. “Funds from operations (FFO), the preferred metric for valuing real estate investment trusts, exceeded estimates. So did revenue, which was up 14.2% over 2020 revenue.”

He noted that few industries were as badly hit by covid as shopping malls after the government imposed strict closures and protocols which combined to reduce customer visits.

Yet somehow, “after sitting at home during this time, people were more than ready to return to malls. My own trips to local malls have seen very few available parking spaces and similar or larger crowd sizes than before March 2020.”

Macerich shares were hit hard, Price noted. “It was forced to issue shares at less than favorable prices last year to ensure the stability of its balance sheet when cash flow dried up. Business has improved significantly since then and the shares have gone from an absurdly low panic floor of $4.80 to around $17 on Dec 13, 2021.”

What is MAC really worth?

Price pointed out that in the pre-Covid years from 2013 to 2019, MAC’s average P/FFO was around 16.9 times. Its typical return was around 4.55% in those years.

In addition, “the average payout ratio of MAC (dividends as a percentage of FFO) was around 70%. Management cautiously cut the dividend during the closing period to 15 cents per quarter from 50 cents. That rate is now likely to start climbing again, as the 2021 payout rate is now just 30.6% of 2021 FFO.”

Those are good numbers, and Price thinks they’re likely to improve.

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