The COVID-19 pandemic proved very costly for Macerich (NYSE:MAC). Not only did the pandemic crush the mall REIT‘s near-term financial results, but it also forced Macerich to issue hundreds of millions of dollars of new stock to shore up its balance sheet, diluting existing shareholders.
Management wants to avoid repeating its prior mistakes by maintaining a more conservative balance sheet. Macerich recently closed its second major asset sale of 2021, furthering its debt reduction efforts.
A toxic debt load
Macerich entered the pandemic with far too much debt. Including its share of joint-venture debt, the REIT had nearly $8.1 billion of total borrowings at the end of 2019, offset by less than $200 million of cash. This put net debt at over 9.3 times the company’s 2019 EBITDA of $845 million.
Making matters worse, the REIT had some major maturities in 2020 and 2021, most notably, its $1.5 billion corporate credit line, which had a balance of more than $800 million at the end of 2019. Because of the company’s high leverage and the uncertainty caused by the pandemic, Macerich was unable to renew that credit facility for the same amount. Instead, it had to issue stock well below pre-pandemic levels to reduce the credit facility balance to a level that would make its lenders more comfortable.
In short, the pandemic taught Macerich and its shareholders — including me — a costly lesson about the importance of maintaining a solid balance sheet. That has made repairing the balance sheet one of management’s biggest tasks for the next few years.
Substantial progress so far
By the end of 2020, Macerich’s balance sheet was even worse than it was at the beginning of the year, with net debt of over $8.1 billion. However, the company has steadily improved its balance sheet over the course of 2021.
Stock sales have been Macerich’s main tool for paying down debt. During the first six months of the year, it raised $808 million — $791 million after commissions — by issuing nearly 60 million shares of stock. This helped it end the second quarter with $7.5 billion of debt (including its share of JVs) and $7.2 billion net of cash.
Macerich is also looking to sell non-core assets where feasible. This spring, it sold a 95% interest in Paradise Valley Mall for $95 million. Macerich and the new majority owner will demolish most of the long-struggling mall and redevelop it as a mixed-use destination.
Last Monday, Macerich announced that it had sold its La Encantada lifestyle center in Tucson for $165.3 million. This deal will generate about $100 million of incremental liquidity after accounting for the property’s $61 million mortgage. Unlike Paradise Valley Mall, La Encantada was one of Macerich’s top retail properties. Management indicated that it decided to sell because Tucson isn’t a core market for Macerich and it was able to get an attractive price because La Encantada is an open-air lifestyle center rather than a traditional mall.
More work ahead
Between the sale of La Encantada, an additional $40 million of stock that Macerich sold early in the third quarter, and internally generated cash flow, Macerich is likely to end the current quarter with no more than $7 billion of net debt.
That said, while tenant sales and leasing demand have improved dramatically for Macerich this year, thanks to strong consumer spending, EBITDA still remains below 2019 levels. Based on its first-half results, it appears that Macerich will generate at best $800 million of EBITDA this year. Thus, its leverage ratio remains quite high: in the vicinity of 9 times EBITDA.
At a recent investor conference, CFO Scott Kingsmore suggested that Macerich would target a leverage ratio of 7 to 7.5 times EBITDA in the long run. It will get part of the way there simply by virtue of improving EBITDA as the business recovers from the pandemic. Macerich also expects to generate some excess free cash flow over the next few years that can support debt reduction.
That said, Macerich will almost certainly need to sell more assets — or continue issuing lots of new shares — to reach its long-term leverage goal. Investors should keep an eye on Macerich’s activity on this front over the next few years.
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