The COVID-19 pandemic has proven to be very costly for Macerich (NYSE: MAC). Not only has the pandemic crushed the Mall REITMacerich’s short-term financial results, but it also forced Macerich to issue hundreds of millions of dollars in new stock to strengthen its balance sheet, diluting existing shareholders.
Management wants to avoid repeating previous mistakes by maintaining a more conservative balance sheet. Macerich recently closed its second major asset sale of 2021, continuing its debt reduction efforts.
Macerich entered the pandemic with far too much debt. Including its share of joint venture debt, the REIT had nearly $ 8.1 billion in total borrowings at the end of 2019, offset by less than $ 200 million in cash. This brings net debt to more than 9.3 times the company’s 2019 EBITDA of $ 845 million.
To make matters worse, the REIT had significant maturities in 2020 and 2021, including its $ 1.5 billion business line of credit, which had a balance of over $ 800 million at the end of 2019. Due Due to the company’s high indebtedness and the uncertainty caused by the pandemic, Macerich was unable to renew this credit facility for the same amount. Instead, he had to issue shares well below pre-pandemic levels to reduce the credit facility balance to a level that would make his lenders more comfortable.
In short, the pandemic has taught Macerich and his shareholders – including me – an expensive lesson in the importance of maintaining a strong balance sheet. This made repairing the balance sheet one of the most important tasks of management for the next several years.
Substantial progress to date
At the end of 2020, Macerich’s balance sheet was even worse than at the start of the year, with net debt of more than $ 8.1 billion. However, the company has steadily improved its balance sheet during the year 2021.
Sales of shares have been Macerich’s main tool in repaying his debt. In the first six months of the year, it raised $ 808 million – $ 791 million after commissions – by issuing nearly 60 million shares. This helped him end the second quarter with $ 7.5 billion in debt (including its share of joint ventures) and $ 7.2 billion in net cash.
Macerich is also looking to sell non-core assets where possible. This spring, she sold a 95% stake in Paradise Valley Mall for $ 95 million. Macerich and the new majority owner will demolish most of the ailing shopping center and redevelop it into 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 around $ 100 million in additional cash after factoring in the property’s $ 61 million mortgage. Unlike the Paradise Valley Mall, La Encantada was one of Macerich’s best commercial properties. Management has indicated that they decided to sell because Tucson is not a primary market for Macerich and that they were able to get an attractive price because La Encantada is an outdoor lifestyle center rather than a traditional shopping center.
More work to come
Between the sale of La Encantada, $ 40 million more shares that Macerich sold at the start of the third quarter, and the internally generated cash flow, Macerich is expected to end the current quarter with no more than $ 7 billion in debt. clear.
That said, although tenant sales and rental demand have improved significantly for Macerich this year, thanks to strong consumer spending, EBITDA still remains below 2019 levels. Based on its results from the first half-year, it appears that Macerich will generate at best $ 800 million in EBITDA this year. Thus, its leverage ratio remains quite high: around 9 times EBITDA.
At a recent investor conference, CFO Scott Kingsmore suggested Macerich would target a leverage ratio of 7 to 7.5 times EBITDA over the long term. It will achieve this simply through improved EBITDA as the business recovers from the pandemic. Macerich also expects to generate excess free cash flow over the next several years that can support debt reduction.
That said, Macerich will almost certainly have to sell more assets – or keep issuing a lot of new shares – to meet his long-term leverage goal. Investors should keep an eye on Macerich’s activity on this front over the next several years.
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