Should You Be Investing in Mall REITs?

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Macy’s, J.C. Penney, and Wal-Mart are some of the retailers that are closing stores, prompting fears that now is not the time to invest in mall REITs. For example, Chris Versace, a writer for the Eagle Daily Investor, has stated that anchor store closings and the rising number of online sales are changing how retailers operate, meaning that people should not invest in mall REITs until the resulting wave of store closures have come to a conclusion.

Are These Concerns Warranted?

There are reasons to believe that fears about mall REITs are overblown. For starters, some stocks have been performing better than others, meaning that there is still hope in the form of REITs with high sales per square foot such as General Growth Properties, Macerich, and Simon Property Group. Also, REITs are still planning new malls, which they probably wouldn’t be if the prospects were really so bad. Mall vacancy rate has been trending downwards since the great recession.

In fact, these companies have been performing better than the average equity REIT. Their dividend yields have been lower, usually an indication that things are going in their favor. As another point of view, WP GLIMCHER and CBL & Associates Properties are offering higher-than-average dividend yields because they have suffered from tenant bankruptcies and store closures with corresponding consequences for their own financial states and share prices.

Also, Brookfield Asset Management bought mall REIT Rouse Properties last month, elevating Rouse’s share price by 25% in 2016. This transaction elevated mall profile, as well.

It is worth mentioning that the concerns over store closures have been exaggerated. For example, Macy’s opened 26 stores even as it closed 40 stores in 2015, suggesting that the problem wasn’t across the board but concentrated in particular locations. Similarly, both Macy’s and J.C. Penney have pointed out the positive correlation between brick-and-mortar stores and their online counterparts that exist because people are able to browse and return products that they buy online. In other words, the conclusion that the rising number of online sales is causing an industry-wide problem for mall REITs is suspect because the evidence shows that having both an online and offline store actually drives up sales rather than drive them down.

Further Considerations

Summed up, it is debatable that mall REITs should be avoided because of the rising number of online sales and stores closures. However, interested individuals should remember that successful investing is based on a lot of hard work, meaning that they should not take this as an endorsement to invest in mall REITs at random without putting in the necessary time and effort.

Source: CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), WP GLIMCHER Inc.(NYSE:WPG), Simon Property Group Inc.(NYSE:SPG), The Macerich Company(NYSE:MAC), General Growth Properties, Inc(NYSE:GGP)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Macerich – The Crown Jewel of Regional Mall REITs

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When activist investors identify and target a company, it is usually for a clear financial reason. This is very apparent in the case of The Macerich Company (NYSE: MAC). In March 2015, the company’s board of directors rejected a bid of US$18.6 billion form its larger REIT competitor Simon Property Group, Inc. (NYSE: SPG) claiming the price was too low. Since rejecting the bid, Land & Buildings and Orange Capital, both activist hedge funds, have pressured MAC to institute changes in their corporate governance. The hedge funds were successful and in early May 2015, Macerich created openings for two independent directors and promised to declassify its board of directors. These changes are expected to clear the path for a potential sale of the company.

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Management’s stance in not selling the company is backed by Macerich’s valuable property portfolio and operational performance. Nearly 50 percent of its malls, classified as Class A+ malls, generate $600 per square foot in sales and two of those properties, Queens Center and Washington Square, exceed $1000 per square foot in sales. Although the company derives more than 70 percent of its net operating income from just 5 states, California, New York, Arizona, New Jersey, and Connecticut, the tenant base is very diversified. Macerich’s largest tenant L Brands accounts for only 2.8 percent of total rents.

Further proof of the company’s strength is evidenced by their Q1 2015 financials. Gross revenues increased by 26 percent when compared with Q1 2014 mainly due to the addition of several properties. Same store net operating income increased by 5 percent reflecting solid growth from existing properties. Macerich’s funds from operations per share increased 6 percent and dividend per share increased by 5 percent rounding out their solid financial performance.

Other operational metrics also came in strong. Sales per square foot for the trailing 12 months have consistently increased since 2009 reaching $607 in Q1 2015. Macerich’s occupancy rate increased from 95.1 percent at the end of Q1 2014 to 95.4 percent at the end of Q1 2015 and releasing spreads increased 20.5 percent for the 12 months ended March 31, 2015.

Management has been prudent in handling the company’s debt with a debt-to-capitalization ratio of 34 percent. The majority of the debt is fixed rate with a weighted average interest rate of 3.49 percent and an average maturity of 5.4 years.

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Currently, Macerich’s price-to-FFO is the highest of its peer group, and with a current share price of $82, the company has been overvalued. Despite the valuation, Simon Properties offered $95.50 a share to purchase Macerich.

This clearly explains why not one but two activist investors have taken an interest in the company.

Source: Macerich website


Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​