Macerich Can Make You Rich Using Naked Puts

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Summary

As any option trader knows, volatility generates higher premiums, and we have been in an unprecedented period of volatility. That creates fantastic opportunities to generate income by selling naked puts.

However, selectivity matters. What happens if the stock is put to you? You don't want to own a stock that is vastly overpriced, or that is facing an uncertain future due to the coronavirus.

That's why we suggest selling naked puts on stocks that are not only value stocks, so that if put to you, you get them below intrinsic value, but stocks that are not staring down at a bleak future.

Malls are not the greatest investments these days, except for one specific kind of mall. Those mall REITs are stocks you can sell naked puts against.

Thesis

As it is, before the virus crisis, retail was a terrible place to be invested. Brick-and-mortar stores were suffering badly due to Amazon and other online competition. Consequently, mall REITs were facing difficult times.

Those anchored by retail tenants were worried that their long-time tenants might face liquidity crunches.

That situation has been exacerbated by the fact that nobody can even go shopping due to the lockdown. But the lockdowns are coming to an end, and that means people will return to the malls. That is, some people will. Others will not because they have spent all their savings while being unemployed, and many will not have disposable income.

Except for one demographic: rich people.

Rich people aren't hurting nearly as badly, and they are particularly anxious to get back out into the world. In fact, just above everyone is. There will be pent-up demand.

That brings us to The Macerich Company (MAC). The company owns 47 properties that are more upscale than most. One of their properties in Santa Monica, California is a good example.

Even better, 20 of its properties are already back up and running in full, with 35 expected at month's end, and all open by mid-June. This is great news and puts MAC ahead of the pack.

From a financial standpoint, this great article on Macerich lays out the liquidity situation for the company, which we consider solid.

For investors who are concerned that Macerich may have violated debt covenants on its $1.5 billion in credit due in July 2021, or that it will have to pay off $800 million worth of mortgages in the next year, we believe these are non-issues.

Lenders do not want to foreclose on property. They are not in the business of operating mall properties. This is an unprecedented situation, and lenders are far more likely to forebear debt service or restructure loans, particularly if they see consumers returning to the malls.

Most of the debt is also unsecured. We just don't see bankruptcy as realistic.

Valuation Rules

What do we consider a value stock? Does MAC stock qualify?

When it comes to storage REIT stocks, we look at P/FFO for relative comparisons and consider a REIT to be a value stock if its P/FFO is below the median ratio that its sector experienced at the end of March - when the stock market was at its lowest and all ratios had contracted as far as they were going to go.

That creates a margin of safety for us.

A look at this chart shows the median P/FFO for mall REITs was 3.6, so MAC is indeed a value stock.

MAC trades at $7.36 as of Thursday's close, with FFO per share of $3.54, giving it a P/FFO ratio of just 2.1.

Risks

There are risks, and just because MAC is trading at a low price doesn't mean it couldn't go lower.

Consumer demand is a primary risk, because consumers spend money in stores, and stores pay rent to Macerich, which is how Macerich pays its mortgages.

We simply do not know how consumers will be spending money going forward.

As much as we anticipate pent-up demand, there is no guarantee it will materialize, regardless of consumer demographic. Will consumers continue to spend online and perhaps stay with those spending habits formed during lockdowns?

There are regional concerns in terms of when properties can reopen. MAC has a concentration of properties in California and New York.

MAC may not be able to renew leases or have to renew at lower rates based on tenant ability to pay market rents.

MAC does have exposure to traditional retailers like J.C. Penney (OTCPK:JCPNQ) that have filed for bankruptcy or may do in the future.

Actionable Conclusion

We have great flexibility with selling naked puts on MAC because the strike prices are only $1 or $1.50 apart.

The July $6 puts are going for about $0.50 each. This is a spectacular 8% return for holding the position for just 8 weeks, which annualizes to 50% per year.

If put to you, you will be buying MAC stock at the equivalent of $5.50 per share, which is about a 25% discount from even this low price.

For those who want to wait a little bit longer to see how the economy shakes out, the September $6 puts are also going for about $1.

If put to you, you will be buying MAC stock at the equivalent of just $5 per share, a discount of more than 30% from this point, and you'll own MAC stock at a P/FFO of just 1.4.

Finally, for the most conservative choice, December's $6 puts sell for $1.50.

You would earn a whopping 25% on your money, and in the process, you'd be hedging your MAC stock bet all the way down to a ridiculous $4.50 per share - below its recent panic low of $4.81.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.