The Macerich Company (MAC) Dividend Cut

The Macerich Company (MAC) is yet another real estate investment trust or ‘REIT’ that has cut its dividend. In fact, Macerich has cut its dividend twice during the COVID-19 pandemic. The first cut was announced back in mid-March. The second cut was announced last week. Macerich is a popular stock for income investors. It has over 20,000 followers in Seeking Alpha. The company even had a fairly long history as a dividend growth stock with nine consecutive years of annual increases.

The REIT was even a Dividend Contender before the cut, but no more. The first dividend cut reduced the regular quarterly dividend by (33%) from $0.75 per share to $0.50 per share. The second dividend cut reduced the regular quarterly dividend by roughly (70%) to $0.15 per share. The stock has been punished severely and is trading at levels last seen during the Great Recession in 2008 – 2009.

Neither dividend cut was that surprising since Macerich (MAC) is a major owner of regional shopping centers or malls in the U.S. Many tenants have been hit hard by the impact of COVID-19. Government restrictions and the requirement for ‘social distancing’ closed many commercial retail locations essentially resulting in no sales at many businesses located in these malls. Hence, the two dividend cuts by Macerich (MAC) was probably unavoidable to preserve liquidity and cash flow.

Overview of The Macerich Company

Macerich is a large, self-administered and self-managed REIT that owns 47 regional shopping centers (greater than 400,000 square feet) and five community or power shopping centers (100,000 to 400,000 square feet). Macerich’s shopping centers range from as large as 3.5 million square feet at Tyson’s Corner Center to as small as 184,000 square feet at Boulevard Shops. The REIT has approximately 51 million square feet of leasable commercial real estate. Most of the shopping centers are on the west coast or in major metropolitan areas including Arizona, Chicago, and the metro New York City to Washington DC corridor. Macerich states that it is a leader in sustainability. It has achieved the No.1 GRSEB ranking in the North American Retail Sector for five straight years 2015 – 2019. Some of Macerich’s properties are LEED Gold certified.

Macerich has repositioned most of its real estate portfolio by selling assets since the last recession. Today, it focuses mostly on Class A regional malls. Class A malls have more sales per square foot than Class B or Class malls. Class A malls have sales of $500 per square foot or more. These malls tend to have higher quality retailers, restaurants, and entertainment options than Class B or Class C malls.

At end of 2019, about 73% of total rents were from mall stores and freestanding stores under 10,000 square feet. The remaining 27% of total rents were from big box stores and anchor tenants. Macerich does not have too much exposure on a percentage basis of total tenants to any single tenant. However, some tenants, such as Forever 21 have filed for bankruptcy. Some of Macerich’s anchor and big box tenants are also struggling due to COVID-19 and growing e-commerce sales. By square footage, Macy’s (M), JCPenney (JCP), Dillard’s (DDS), and Nordstrom (JWN) are the largest tenants.

What is a Real Estate Investment Trust Anyway?

A real estate investment trust or ‘REIT’ is a corporation that owns, operates, or finances income-generating real estate. A REIT’s stock is usually publicly traded on stock exchanges. So, in this way, small investors are able to invest in the commercial real estate market without having large amounts of their own capital.

To qualify as a REIT, a company must own real estate that generates income and is distributed to shareholders. Specifically, according to Investopedia, a REIT must

• Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
• Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
• Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
• Be an entity that’s taxable as a corporation
• Be managed by a board of directors or trustees
• Have at least 100 shareholders after its first year of existence 
• Have no more than 50% of its shares held by five or fewer individuals

Details on the Dividend Cut by Macerich (MAC)

Macerich (MAC) first cut the dividend fairly early in the coronavirus pandemic on March 16, 2020. The company cited the rapidly changing environment. So, it was likely that as early as mid-March the pandemic was affecting traffic in Macerich’s malls. In hindsight this is not surprising. Macerich has eight properties in California. California reported its first COVID-19 case at end of January. By early March, the state was operating under restrictions and closures.

The specific statement from the company was:

Given the uncertain and rapidly changing environment, the Board of Directors has determined that the cash component of the dividend (other than cash paid in lieu of fractional shares) will not exceed 20% in the aggregate, or $.10 per share, with the balance payable in shares of the Company’s common stock.  This will allow the Company to comply with the REIT taxable income distribution requirements, while retaining capital and enhancing the Company’s financial flexibility.

and

The combination of the dividend reduction and the stock dividend will result in the Company retaining incremental cash in excess of $98 million on a quarterly basis. The decision to issue a stock dividend will be made by the Board on a quarterly basis.  If implemented on an annual basis, the reduced dividend and the stock dividend would result in approximately $400 million of additional retained cash.  The Company expects to use the retained cash to reduce debt and for general corporate purposes.  In addition, the Company will be evaluating all capital uses including the size and pace of redevelopment investments.

So, the first dividend cut by Macerich (MAC) not only reduced the payout but also switched it to 80% stock/20% cash. By end of March, Macerich indicated that state and local governments had closed or restricted operations of many of the REIT’s tenants to promote ‘social distancing’. The company also expected at the time that closings and restrictions would spread to other properties. Mall traffic and occupancy at its malls were significantly impacted.

The second dividend cut was announced on July 24, 2020. The specific statement from the company’s CEO was:

The Board’s decision to reduce the dividend allows us to preserve liquidity and financial flexibility in the continued uncertain economic environment resulting from the COVID-19 pandemic. The Board will continue to re-evaluate the Company’s prospective dividend policy each quarter. 

Final Thoughts on the Dividend Cut by Macerich (MAC)

It is not really clear when Macerich will return its dividend to the prior payout. The main problem is that COVID-19 is not the only challenge for mall operators. There is also the onslaught of e-commerce and the effect on its tenants that they need to contend with. That said, the company will likely be able to deal with the near-term impact of COVID-19. By mid-May, 20 of Macerich’s properties were reopened. By mid-June, all of the REIT’s properties were reopened. Mall traffic is reportedly rebounding but is still down when compared to the prior year.

For comparison, Macerich (MAC) did cut the dividend slightly during the Great Recession. Afterwards, the REIT started to raise the dividend again. But my general sense is that this time may be different as COVID-19 combined with the transition to more on-line sales may put downward pressure on occupancy rates and rental rates. In turn, this will keep a lid on the dividend in my opinion.

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