E-commerce Trends Will Pressure Declining Mall Revenues

Key Takeaways

• Persistent shifts to e-commerce and changing consumer preferences threaten long-term leasing revenue and profitability, despite recent leasing gains and backfilling efforts.
  
• High leverage and exposure to underperforming malls increase refinancing risk, limit redevelopment capacity, and pressure future earnings and cash flow.
  
• Strong leasing momentum, strategic acquisitions, asset repositioning, and operational efficiencies are driving higher occupancy, improved margins, and positioning the portfolio for sustained growth.

Catalysts

Macerich is a fully integrated, self-managed, self-administered real estate investment trust (REIT).

• The persistent, long-term shift toward e-commerce and digital retail threatens to undermine Macerich's efforts to maintain or grow leasing revenue, as even with strong recent leasing activity, the secular decline in physical mall foot traffic will put sustained pressure on rent growth and overall net operating income over the next decade. This is expected to negatively impact both revenue and profit margins as traditional mall tenants continue to lose market share.
  
• Demographic shifts, including aging populations and evolving preferences among millennials and Gen Z for open-air, mixed-use environments and experiential or non-traditional retail, are eroding long-term demand for enclosed, mall-centric properties. Despite recent success in backfilling anchor tenant space and boosting leasing spreads, Macerich will likely face higher structural vacancy and lower achievable rents, resulting in weaker earnings and revenue growth over time.
  
• Macerich remains highly leveraged, with net debt to EBITDA still near eight times, creating significant refinancing risk and leaving the company exposed to rising interest costs and limited capacity to fund necessary redevelopment or modernization. This structural weakness makes it challenging to maintain net margins and constrains the REIT's ability to generate consistent free cash flow.
  
• The company's legacy concentration in Class B and underperforming malls amplifies exposure to retail bankruptcies and store closures, leading to rent concessions and higher turnover. Even as leasing momentum improves in the short term, the risk remains that major co-tenancy triggers and a shrinking pool of anchor tenants will drive down base rent and reduce occupancy, pressuring net operating income and overall profitability.
  
• Intensifying long-term industry headwinds, including chronic oversupply of U.S. retail space and rising capital expenditures required for mall repositioning, are expected to drive up costs just as future rental income becomes less predictable. This will compress sector-wide margins, make it increasingly difficult to deliver stable dividends, and place further downward pressure on Macerich's long-term earnings and return on equity.

Macerich Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Macerich compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Macerich's revenue will decrease by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -18.0% today to 7.2% in 3 years time.
• The bearish analysts expect earnings to reach $69.5 million (and earnings per share of $0.09) by about July 2029, up from -$184.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $92.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 104.9x on those 2029 earnings, up from -40.8x today. This future PE is greater than the current PE for the US Retail REITs industry at 26.4x.
• The bearish analysts expect the number of shares outstanding to grow by 3.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Risks

• Sustained strong leasing momentum, with year-to-date lease signings for both new and renewal deals significantly exceeding prior years and well ahead of schedule in the company's 5-year growth plan, suggests potential for higher-than-expected occupancy and revenue growth in the long term.
  
• Strategic acquisition of Crabtree Mall, a dominant Class A asset in a high-growth southeastern market, is expected to be accretive to funds from operations, provides embedded net operating income growth, and positions the portfolio for enhanced earnings and value appreciation.
  
• Execution of the Path Forward plan, including substantial asset dispositions and targeted deleveraging, is already reducing net debt to EBITDA, improving the balance sheet, and creating capacity for future investment, which could stabilize or enhance net margins over time.
  
• Consistent positive leasing spreads across 15 consecutive quarters, backfilling of low-rent anchors with higher-paying and experiential tenants, and the ability to replace underperforming retailers with stronger brands are driving higher rental rates and supporting net operating income improvements.
  
• Integration of technology and improved leasing systems has significantly increased the company's operational efficiency, allowing for faster capital allocation, streamlined decision making, and optimized tenant mix, all of which can contribute to sustained earnings growth and competitive margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Macerich is $19.85, which represents up to two standard deviations below the consensus price target of $25.31. This valuation is based on what can be assumed as the expectations of Macerich's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $962.1 million, earnings will come to $69.5 million, and it would be trading on a PE ratio of 104.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of $25.28, the analyst price target of $19.85 is 27.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.