Rouse Properties, Inc., (NYSE:RSE), a billion-dollar capitalization company that broke off from General Growth Properties (NYSE:GGP) in 2012, initially claims to be, in terms of valuation and operational metrics, a smart choice in the regional mall REIT space. However, several unique challenges make its stocks considerably more risky.
From a valuation perspective, RSE has the best figures among regional malls REITs (click here for a comparison). Its price-to-FFO ratio is 11 and its dividend yield 4.1, as opposed to the peers’ medians of 17.2 and 3.2 respectively. In addition, the management believes that its FFO per share growth for 2015 will exceed those of its peers and rank among the highest.
From an operational perspective, the business had some highlights in the first quarter of 2015: Same-property Core NOI went up by 2.4 percent, and sales for operating portfolio increased by 6.1 percent during the twelve months ended March 31, 2015, compared with the same period the previous year; and average rents under 10,000 square feet (the majority of the leases) saw a 4.9-percent improvement. Tenant mix, too, is balanced, and concentration appears not to be an issue. L. Brands, Inc. — the biggest tenant — represents 4.3 percent of the rent, but several other businesses are subsumed under its umbrella.
The portfolio, which consists of 35 regional malls in 21 states that total more than 24.9 million square feet, experienced an occupancy rise, with 90.1 percent being leased, compared with 89.9 percent the past year.
Conversely, an investor in RSE must deal with these challenges:
- a 60-percent debt-to-total market capitalization ratio (on the higher end). On March 31, 2015, RSE had about $1.5 billion in outstanding debt, with an average interest rate of 4.64 percent and a term-to-maturity averaging 4.8. Fortunately, most of that debt is fixed-rate.
- The malls on which RSE focuses generate lower sales per unit area. They invest in class-B malls (those generating $300 to $500 per square foot ($334 is the sales-per-area for RSE). This fact makes competition a risk for investment strategy; the company says, however, that about 80 percent of their mall assets are the only enclosed ones in their markets and sub-markets.
- Early in 2015, the company saw more competition for market share in the retail shopping sector. Stronger retailers have displaced some of the weaker ones, forcing some of them to close and even declare bankruptcy.
- Brookfield Asset Management has significant ownership of RSE’s common stocks (33.6 percent). Although ensuring that such a real estate powerhouse is an important investor, any disposition by Brookfield can change the market’s perception and make the stock more volatile.
RSE clearly showcases that good metrics constitute a buy, but its size, debt profile and target market space put its stock on the riskier side of the spectrum.
Written by Heli Brecailo
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