Imagine a stock chart of the cyclical company, how does it look and when would you like to but it?
Now check the graph below:
I think whatever your views on the coronavirus were - you can now agree that the reopening is comming soon, specifically in the US (some parts of the world could be lagging), but the vaccine rollout and the goal of opening soon is seen in US. We can leave the discussions on the reasons f that outside of this topic.
Obviously the stock market is forward looking, hence majority of the reopening plays are already gone and you are late to really hop in. Indeed there is still upward potential in airlines, energy companies, cruise lines, restaurant chains, but thy have run up already quite significantly. Take an example of Boeing ($BA) with a share price of 340 prior to the lock down. The price is now 250 up 56% from the lows of around 160 and all of this with company to still being expected to make a loss and a huge dilution through the issue of shares.
Company that I want to introduce to you is Macerich ($MAC) - REIT that holds a number of malls in US with biggest exposures in California and New York - the states that were one of the strickest in terms of the COVID restrictions. With reopening - the company and the stock could see the improvement in the results and a stock price that is quite significant.
Your first question will be: why is this reopening trade did not run away yet? To answer this immediately we will have to run at first through risks and a bear case of the company.
1) Slow reopening and big debt. While businesses like energy companies (people still use energy, drive cars, order goods that need to e shipped) , restaurants ( can offer take away, deliveries) could continue some sort of business - malls were shut down almost fully. Yes some of the tenants in malls have longer term contracts, but malls had to reduce their revenues in order to maintain healthy business relationships rather than suing all the clients for short-term benefit. Plus the company had quite a big debt load with debt to equity hitting 2.6 - largest amount since 2009 (by the way check what price it had back in 2009). Can we expect the same rebound?
2) Despite this, the stock of company tried to run alongside with other reopening plays the price got to as high as 22,35, but then dropped and was part of the wallstreetbets stocks (we will talk about this later). It then went down significantly, as management tried to use this situation (and I say that their decision was correct) and issued shares. Through March 25, 2021, the Company has sold 36.0 million shares of common stock under its "at the market" equity program at a weighted average price of $13.54 per share (25% dilution), generating gross proceeds of approximately $487.3 million. As of March 25, 2021, approximately 1.0 million shares remain available to be issued under the program.
One might say that is a very bad sign as it dilutes the shareholders and indeed it is like that if you are a shareholder at the moment of the dilution. With this move the company resolved it's short term liquidity issues with debt and the price went back to 11.5 that gives us a great opportunity to buy in quite cheap.
3) The third bearish point is a longer term concern that all malls are dead because you can buy everything online through Amazon. This is actually a reason why the price of the stock was already falling before the coronavirus crisis. It is up to you to believe in this story or not and this would rather dictate whether you want to e long term or short term in this company, but as a minimum a short term hold makes sense (check the financials and other point below).
I normally combat this point with few ideas:
a) would you like to go to the mall or do you know friend who want to go to the mall when restrictions are over? Malls are not only for buying things. People go there to watch a movie, get a starbucks cofee, meet with friends, let the kids play on the playground, eat some junk food, etc. It is more an experience. Yes, you can make a coffee at home, watch a movie on the TV, does it kill starbucks and cinema theaters?
b) Amazon itself understands the above point and is a client of MAC. Check the 2017 article of CNBC: E-commerce gets physical: Meet Amazon's new landlords (cnbc.com)
c) There are rumors that Amazons 24 or 48 hours delivery is actually a loss making thing for Amazon in a try to push out malls from business. Will Amazon be able to continue this for ever? Maybe, but again a question. There are talks that new Biden administration and actually a number of other countries want to tax companies like Amazon that would likely increase the prices on amazon and again be a bit more positive for malls and physical shops.
d) Macerich is quite adaptable and repurposes its malls to other clients if the opportunity is there. Even if malls are dead the real estate can be used if it has a good location (and most of them do). You heard on google investment of 3bn into new offices in the preparation to the return to normality?. Well, MAC gets pat of that as well: Google Leases One Westside, Hudson Pacific Properties and Macerich’s Planned Westside Pavilion Mall Redevelopment | Macerich
Now let's move more to the bull thesis of the article
Financials
Now a bit about the bull case and the financials of the company. Obviously the ompany had a bad year of 2020 with EPS being a loss of -1.58 USD per share compared to 0.68 of the year before that. (the price of the company was 25.6 2019 compared to 11.5 now.
BUT, this is a REIT (real estate investment trust) and normally those are assessed based on free cashflows(FFO) and dividends.
In 2020 Macerich t reported an adjusted FFO per share of $2.16 (still positive). The annual dividends of the company were 0.6 USD hat gives us a yield of 5.2% that is respectable. But just before the coronacrisis the dividends were 3 USD per dollar.
If we assume return to normal, this translates to 26% yield, or if we assume that the yield remains around 5% this should mean the price of the stock should be around 60 USD. Indeed there are now more shares in issue and hence the price and the dividends per share will be lower, so give it a discount of 25% for the 25% dilution, but the upside is still significant to 40-45 USD.
Risk/Reward tradeoff
The lowest the stock went was around 6 USD in the peak of Coronavirus panic. Will we retest it? I doubt unless there are new news on the lockdown. If you believe in this thesis - better to be 100% cash, as the full market will tank. But the worst decline will be additional 50%, though I beleive that we will never see the 6 USD price again. the upward potential is more or less described above. 22.35 USD price was already tested this year, 40-45 USD could be seen within 1-2 years after return to the normality. Depending on your time frame you and belief whether Amazon actually will kill the malls, you could go for a quicker 2x or longer term 3-4x.
The worse things that could happened are already there ( the coronavirus recovery took very long, dilution of shareholders due to liquidity issues took place, dividends were cut). There is not a lot of additional downside events left.
Dividends
This is a debatable plus, as some people prefer companies that do not pay dividends, but this is a REIT that is just obliged to pay dividends.
Last time you had a price of around 11 for this company was in 2009. On average, even if you would hold this stock all the time you would earn around 2.2-2.4 USD per year. so you would earn around 29 USD per share, so around 3x. So even if you sleep on the exact timing you will earn money on this. While you are waiting for the price to recover - you get the divvi.
Recent takeover bid declined
You can read the full news here: Macerich Rejects Simon Property’s $16.8 Billion Takeover Bid - WSJ
But in short: Macerich, in a letter to Simon Property Group, said the offer of $95.50 per share undervalued the company and its growth prospects. Simon said it was pulling the offer in light of Macerich’s decision “not to engage in discussions with Simon.”
So is my estimate of 40-45 USD per share reasonable, or should it be more than 95.5?
Short float:
I left this for the end, as I do not see this company as a pure play to squeeze the shorts, but this was one of the stocks discussed in the walstreetbets subreddit. Unlike GME, I find this a viable and good business and indeed the 25-35% short interest might be an additional impulse for the stock price once we return to the normality. This and $RKT, that I might discuss in another post are the "Wallstreetbets" stocks that I actually like.
And I finish this article with a final chart:
