New Leasing Strategies And Asset Optimization Will Strengthen Future Performance

Key Takeaways

• Strategic consolidation and space utilization are key to driving future revenue growth and enhancing financial stability.
  
• New leasing strategies and asset sales aim to improve efficiency, occupancy, and earnings potential.
  
• Increased leasing transitions, interest expenses, and capital costs may strain revenue, impact FFO and NOI, and hinder leverage reduction efforts.

Catalysts

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

• Macerich's strategic focus on enhancing operational performance by consolidating joint ventures and unlocking the full revenue potential of underutilized spaces should drive future revenue growth.
  
• The implementation of new leasing management tools and processes is poised to increase efficiency, improve tenant coordination, and potentially enhance net margins by reducing leasing overhead and downtime costs.
  
• The company's shift towards a larger percentage of new leases versus renewals is expected to yield higher rents and positively impact revenue and net operating income (NOI) over time.
  
• Macerich's focus on increasing permanent occupancy from 84% to 89% by 2028, supported by a robust pipeline of signed but not open deals, is projected to enhance NOI and earnings stability.
  
• The strategic sale of non-core assets and leveraging its high-demand land parcels for potential developments could significantly reduce leverage and improve overall financial stability, thereby enhancing earnings potential.

Macerich Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Macerich's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -11.7% today to 0.6% in 3 years time.
• Analysts expect earnings to reach $6.1 million (and earnings per share of $0.05) by about August 2028, up from $-118.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $21.3 million in earnings, and the most bearish expecting $-18.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1315.0x on those 2028 earnings, up from -35.4x today. This future PE is greater than the current PE for the US Retail REITs industry at 25.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.33%, as per the Simply Wall St company report.

Macerich Future Earnings Per Share Growth

Risks

• The transition to a higher percentage of new leases over renewals could result in temporary rental revenue downtime, impacting short-term FFO and same-store NOI growth expectations.
  
• Interest expense has increased due to the amortization of debt mark-to-market, which will lead to a reduction in FFO until 2027 as these non-cash expenses roll off.
  
• The planned higher tenant improvement and capital costs related to bringing in new tenants may strain free cash flow in the near term, affecting the company's ability to reduce leverage and debt.
  
• The ongoing process of asset sales, especially the disposition of lower-performing Eddy properties, might lead to a negative impact on short-term FFO as these sales reduce current income-generating assets.
  
• Any potential delays or higher costs in the development pipeline could reduce the expected contribution to NOI from these projects, potentially affecting long-term leverage reduction and earnings.

Valuation

• The analysts have a consensus price target of $19.067 for Macerich based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $6.1 million, and it would be trading on a PE ratio of 1315.0x, assuming you use a discount rate of 9.3%.
• Given the current share price of $16.58, the analyst price target of $19.07 is 13.0% higher.
• 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.