Mall real estate investment trust Macerich (MAC) currently trades roughly 15% below our $59 fair value estimate. We believe the company benefits from a narrow economic moat derived from the network effects and efficient scale found in its portfolio of high-quality malls. Macerich has successfully transitioned its 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 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 REITs 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.
Kevin Brown does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.