Morgan Stanley: Taubman Could Be More Attractive M&A Candidate Than Macerich

Among mall REITs, Taubman Centers, Inc. TCO and Macerich Co MAC have underperformed relative to  Simon Property Group Inc SPG, primarily due to the greater cash flow headwinds the former two face, according to Morgan Stanley.

The Analyst

Analyst Richard Hill upgraded Taubman from Underweight to Equal-weight and trimmed the price target from $51.50 to $50.

The analyst downgraded Macerich from Equal-weight to Underweight and reduced the price target from $58 to $45.

The Thesis

Even as cash flow headwinds persist, Taubman is likely to see its free cash flow inflect higher over the next two years, while Macerich's is expected to continue to decline, Hill said in a Monday note. (See his track record here.) 

The analyst said he's skeptical of the consensus belief that Macerich is a more likely M&A candidate than Taubman due to the following reasons:

Taubman's board now has an activist investor, and six board seats are coming up for re-election next summer; activists have exited positions in Macerich.

Taubman has higher quality assets and a debt-to-cap of 47 percent, which suggests the company has an increased likelihood of taking itself private.

The economics of third-party M&A are not obvious at the current share price, assuming a 10-percent required internal rate of return.

Hill sees higher upside potential for Taubman based on consensus NAV.

Morgan Stanley reduced its 2019 and 2020 FFO estimates for Taubman by 14 cents each to $3.61 and $3.76, respectively. That said, the analyst sees the FFO inflecting higher from an estimated $6.7 million in 2018 to $112 million in 2019 and $252 million in 2020.

The sell-side firm reduced its 2019 and 2020 FFO estimates for Macerich by 6 cents and 5 cents, respectively, to $3.96 and $4.07. The FFO is set to decline from an estimated $598 million in 2018 to $312 million in 2019 before rising to $334 million in 2020, Hill said. 

The Price Action

For the year-to-date period, Taubman shares have lost 19.7 percent and Macerich has slumped 21.5 percent.

Taubman was up 2.38 percent at $52 at the close Tuesday, while Macerich was down 0.49 percent at $48.70. 

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