Rising US Urbanization And Experiential Trends Will Redefine Mixed-Use Retail

Key Takeaways

• Rapid leasing momentum and premium tenant mix are driving substantial upside potential in margins, earnings, and long-term rent growth beyond modeled expectations.
  
• Mixed-use developments and demand from top retail brands position the portfolio for sustained cash flow growth and enhanced resilience amid evolving market trends.
  
• Reliance on physical retail and high leverage, coupled with flat portfolio performance and ongoing redevelopment needs, challenge Macerich's financial flexibility and growth prospects.

Catalysts

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

• Analyst consensus points to Macerich's leasing pipeline driving growth, but the company is running well ahead of even bullish expectations, with new lease deals and signed-not-open (SNO) pipeline pacing far faster than modeled, which could lead to material outperformance in revenue and NOI versus current forecasts.
  
• Although analysts see upside from new leases coming in at higher rents, this is likely understated since a majority of backfilled space is being replaced by best-in-class experiential and luxury tenants, allowing Macerich to more than double rents on recaptured anchor space, thus materially lifting future margins and earnings power as high-productivity tenants ramp sales and traffic.
  
• The accelerating urbanization of major U.S. metros and the shift to an "experiential economy" are set to substantially boost foot traffic and tenant demand at Macerich's irreplaceable, high-density locations, creating embedded long-term rent growth and occupancy upside not yet factored into current financial models.
  
• Macerich's deep pipeline of mixed-use densification projects-such as new hotel, residential, and office integrations at existing retail centers-positions the company to capture multiple ancillary revenue streams, unlocking sustained NOI and asset value growth beyond what is achievable from retail alone.
  
• As omnichannel and digitally native brands increasingly require top-tier physical locations as hubs for last-mile fulfillment and brand experience, Macerich's portfolio is becoming essential infrastructure for the next generation of retail, driving superior leasing demand and long-term cash flow durability, which is apt to reduce its equity risk premium and support multiple expansion.

Macerich Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Macerich compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Macerich's revenue will decrease by 0.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -11.7% today to 2.8% in 3 years time.
• The bullish analysts expect earnings to reach $28.7 million (and earnings per share of $0.12) by about August 2028, up from $-118.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 367.0x 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 25.7x.
• 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 persistent long-term shift toward e-commerce and digital shopping continues to reduce physical foot traffic in malls, which risks eroding retailer demand for leases and puts downward pressure on Macerich's rental revenue and overall net operating income.
  
• Macerich has a history of high leverage, and while recent progress has been made, net debt to EBITDA remains high at nearly eight times, exposing the company to refinancing risk and possibly higher interest expenses in the future, which could negatively affect net margins and earnings.
  
• The company's substantial reliance on asset sales and loan givebacks to meet deleveraging targets creates uncertainty; inability to successfully execute remaining dispositions or secure attractive pricing could constrain liquidity and balance sheet strength, impacting future free cash flow and financial flexibility.
  
• Portfolio sales per square foot and occupancy rates have been flat or slightly declining when accounting for non-core assets, and limited sales growth could restrict Macerich's ability to push rents higher and drive future revenue increases.
  
• Redevelopment and capex requirements for underperforming or vacated anchor spaces (exemplified by Forever 21's bankruptcy and the Green Acres project) entail higher upfront capital spend and slower realization of income, which may compress margins and delay improvement in funds from operations.

Valuation

• The assumed bullish price target for Macerich is $24.93, which represents two standard deviations above the consensus price target of $19.07. 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 bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $28.7 million, and it would be trading on a PE ratio of 367.0x, assuming you use a discount rate of 9.3%.
• Given the current share price of $16.58, the bullish analyst price target of $24.93 is 33.5% 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.