$543 Million In Short Positions For The Macerich Company (NYSE:MAC)


Introduction

At $1.03 billion market cap, The Macerich Company (NYSE:MAC) is a leader in shopping mall real estate ownership. Malls and physical retail were already experiencing a declining trend before COVID-19. Now, the future of shopping real estate is even more uncertain. Based on fundamentals, our long-term recommendation is to underweight. However, be on guard for a potential short squeeze as this could send the price in a violent move upwards, making Macerich a speculative buy if the price breaks resistance levels.

Macerich Provides COVID-19 Update

Overview

A company in the podium of retail real estate ownership

The company is widely considered the 3rd largest shopping center owner & operator in the United States. With 52 prime properties, Macerich manages high-quality malls from coast to coast in top locations. The company classifies its properties in three segments: 32 major markets, 17 regional centers, and 3 outlets.

One third of the revenues come from California, while the Phoenix Metro Area is its most uncontested market where Macerich owns 9 shopping centers.

Figure 1 – The Macerich Company Properties (source: corporate website)

What motivated the founders and how did they make it happen?

In 1975, a decade after founders Mace Siegel and Rich Cohen partnered together, their aim focused on buying underperforming properties and converting them into top assets. That approach earned the company the nickname of “Dr. Mall”. The founders saw a substantial opportunity in the redevelopment space and grabbed the bull by the horns.

Their competitive advantage was mainly in three areas:

  • Scale, speed, and costs in their redevelopment efforts
  • Selection of adequate locations for growth
  • Top relationships with anchor retailers

The stewards of Macerich in the 21st century

Macerich had multiple leadership changes during the last couple of years and, currently, has a leadership structure consisting of a CEO, a President, and an Independent Chairman.

Thomas O’Hern is CEO, and Edward Coppola holds the title of President. Both had multi-decade careers inside the company. On the other hand, Independent Chairman Steven Hash joined recently Macerich and is part of the boards of multiple REITs (some publicly-traded and others private REITs), in addition to being a director in the board of a SPAC.

Adding color to the origin of the company’s name, it was founded in 1964 by Mace Siegel and Richard Cohen, of which Macerich is a portmanteau. The company is a 56 years old organization and the founders were no longer involved after the first decade of the 21st century.

The Golden State hosts

Macerich is headquartered in Santa Monica, CA. It also has offices in Phoenix, Dallas, and in the states of New York and Virginia.

Many successes since 1964 and also some more recent anecdotes of things that didn’t work out as expected

In 2015, Macerich rejected a competitor’s takeover bid for $16.8 billion. The rejection rationale? Quoting then chairman and CEO Arthur Coppola:

“Our board believes that continuing to execute our strategic plan will yield substantially more value for our stockholders.” – 2015

That same year, SEARS and Macerich created a 50/50 joint venture involving 9 properties.

Analysis

Retail was being eaten by eCommerce – Now, COVID-19 finishes the job

Major iconic retail firms like SEARS or J. C. Penney were once the anchor tenants of mall REITs. This class of tenants has shrunk and, in many cases, disappeared. During 2019, there was already an avalanche of retail bankruptcies that swept the markets, listed in the below infographic by CBInsights:

Figure 2 – 2019 retail bankruptcies (source: CBInsights)

If eCommerce was already an effective destructor of physical retail fabric, COVID-19 has given the kiss of death to a second round of legendary brands:

Figure 3 – 2020 till July retail bankruptcies (source: CBInsights)

The eCommerce trend is not changing in the foreseeable future. Retailers will continue downsizing their physical presence while trying to grow online. COVID-19 is just accelerating what was already in motion, and it is yet uncertain if there are going to be permanent changes in consumer behavior (i.e. even less in person shopping) after the pandemic.

Debt and leverage can compound Macerich’s problems

The company is one of the most leveraged mall REITs out there. Although Macerich hasn’t issued bonds maturing in the next few years, the company has engaged in multiple debt financing deals with lenders that will require principal payment from now to 2025. There is a chance that Macerich would need to start selling its assets to repay debt. If this happens and simultaneously other potential buyers are also in a poor liquidity situation because of the macro trend retail experiences, then Macerich would recover lower-than-expected amounts for prime properties.

Leverage Ratios MAC Peers
Debt/Equity: 2.38 1.04
Debt/Assets: 0.65 0.47
Debt/EBITDA: 11.03 6.34
Debt/Cash: 11.99 19.11
Interest Coverage: 0.47 2.08
Quick Ratio: 1.96 1.54
Current Ratio: 1.99 1.96
Debt/Capital: 15.9 6.45
Financial Leverage: 3.69 2.2

Table 1 – Leverage ratios of Macerich compared against industry peer average

Macerich has one of the highest short ratios in the stock market

As of 10/2/2020, bears have shorted 68.2% of the float of the company (~$543 million at the day’s close.) No other company in the small-cap size segment has comparable short interest. No large- or mid-caps display similar float shorts either. The only companies with a higher proportion of float shorts are a couple of micro-caps under $300 million market cap.

We find this data point remarkable. If most that wanted to short in the investment business have shorted already the Macerich stock, there are few bears available to continue the charge against the stock price, and the path upwards has been cleared for bulls.

Hence, we suggest keeping an eye on resistance levels that could trigger margin calls for short sellers. Some price levels to observe are $8.00, $9.00, $11.00, and, finally, $13.00. If these levels are penetrated, it would be a reasonable bet to buy shares on the way up with the corresponding stop loss orders.

MAC The Macerich Company daily Stock Chart

Figure 4 – Macerich stock price chart

The options markets are anxious about the November earnings announcement

Macerich is expected to report quarterly earnings on November 5th. The options contracts that expire right after the earnings announcement show strong demand for protection at low strike levels. In particular, the November expiration at strike $3 (-59% of today’s price of $7.39 on 10/2/2020) shows almost twice as much cost to hedge than the December expiration at the same strike.

This situation usually points to one conclusion: investors fear a stock crash after earnings.

Figure 5 – Volatility smile November (orange) vs. December (red)

Analysts keep downgrading Macerich, although no sell consensus yet

In the last year, eight analysts out of 12 have downgraded their recommendations. The last one to do so was Morgan Stanley, recommending underweight from equal-weight. The most negative analyst for the moment has been Goldman Sachs in July this year, with a sell recommendation (the only one for the moment).

We believe there is still a possibility for Macerich of having more recommendations downgraded after earnings are reported in November. Things can get worse in terms of price performance once more analysts switch from underperform to sell.

Conclusion

The Macerich Company is one of the leading REITs in the shopping mall space. However, the eCommerce wave and now the COVID-19 tsunami are affecting deeply the company’s market segment. These macro trends won’t improve in the future. In addition, Macerich is a highly levered company that will need to negotiate with lenders in the midst of an adverse environment. On the other hand, it is one of the most shorted companies in the stock market, which makes us cautious about a full sell recommendation. Our suggestion is to underweight in the long term, while keeping an eye on potential upward moves in price in the short term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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