EUR 850.00 For Business Accounts Only

Morningstar | Investors Looking for Holiday Bargains Should Consider Mall REIT Macerich

Macerich currently trades at roughly a 15% discount to our $59 fair value estimate. We believe the company benefits from a narrow moat derived from the network effects and efficient scale found in its portfolio of high-quality malls. Macerich has successfully transitioned the portfolio through asset sales of lower-quality malls and redevelopment of higher-quality properties into a true Class A mall portfolio. While we recognize that e-commerce will continue to apply significant pressure to brick-and-mortar retail, we believe there will be a continued bifurcation of physical retail performance, with the highest-quality assets continuing to produce strong sales growth while the lower-quality product sees foot traffic and sales decline. Macerich has demonstrated this thesis in 2018 with sales per square foot over the prior 12 months up 7.3% for the total portfolio and re-leasing spreads of 10.9% in the third quarter. While we do expect that sales growth and re-leasing spreads will slow from these levels over the next decade, we don't project either going negative in our forecast. Given that the company underperformed the broader market after interest rates increased in September and we think short-term negative performance for real estate investment trusts from rising rates generally reverses itself within four to eight months, we think this is a good opportunity to invest in a narrow-moat company that we believe will be one of the winners in retail.

In addition to our narrow moat rating and long-term outlook for Macerich, we believe there are some short- and medium-term catalysts for the stock, and thus we are making the company one of our Best Ideas. Black Friday saw sales increase 9% and Cyber Monday saw sales surge 19% over the same dates in 2017. While most of that increase is due to increased online sales, omnichannel players drove most of the online sales this year. Customers looking to return merchandise they purchased over the weekend will often return it to the store, and frequently shoppers who return products will buy replacements or do other shopping in the store. We think the fourth quarter could be strong for physical retailers in addition to e-commerce players. Either way, the strength of omnichannel companies this holiday season reinforces our thesis that physical stores in high-quality locations will remain essential to any retail strategy. This should play out over the medium term as well as Macerich looks to fill the recently announced Sears closures in its portfolio. While the closure of these anchors reduces rents in the short term, in the longer term the closures should drive significantly higher sales and rents to Macerich as management can fill the vacancies with more-attractive tenants more capable of driving foot traffic to the malls than Sears.

Finally, Macerich is expanding its program to introduce online-only retailers to physical retail. It is creating a space that will be filled with customizable, smaller storefronts for e-tailers on short-term leases looking to experiment with physical stores before they consider rolling out to a larger footprint and more stores. If this experiment goes well, Macerich will be able to convert its competition into tenants and will have built relationships with these rapidly growing companies as they look to expand into more high-quality locations. We think Macerich has several significant opportunities to create value over the next year that should serve shareholders well.