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.

Simon Spoiled Taubman’s Mall Project

Last Friday, some investors in the financial markets were disappointed at the Q4-2015 results of Simon Property Group, a huge regional mall REIT ($58 billion market cap), but in the world of brick and mortar, that may not be the case. Simon looks to have beaten Taubman Centers’ ($4 billion market cap regional mall REIT) plan to open an enclosed shopping mall in downtown Miami. Taubman is instead settling for a high end retail street.

chart03.pngAlong with Miami Worldcenter Associates and Forbes Company, Taubman intended to construct a 765,000 square foot mall which was fully enclosed. While retail, dining and entertainment were to be key, over 40% of the mall was set to be dedicated to Bloomingdale’s and Macy’s. Included in the plan was a pedestrian-only street which featured multiple restaurants and shops on 7th street, which led directly to the American Airlines Arena. A press release on Jan 11 stated that the mall project had been discarded, and in its place would be a high end retail street, positioned south to north between 7th and 10th streets.

chart04.pngSimon planned to construct an open-air shopping center simultaneously in downtown Miami. The luxury mall is to be 500,000 square feet, and complete with high-end retailers along with plenty of dining and entertainment facilities in the Brickell neighborhood. Part of the project has already been finished and is to open this year. Local developers have been developing the project with Simon. Both projects are mixed-use and also include offices, hotels and residences.

chart05.pngTaubman’s decision strikes many as yet another signal that the idea of a mall no longer works in America. Cities have become increasingly urbanized and, along with the growth of online shopping and the boost to high street shopping, malls have become marginalized. But while Taubman is looking to expand overseas, and in particular to Asia, it’s unlikely that they will scrap future mall projects in the U.S. This scenario appears to be just a downtown Miami battle between two competitors.

chart02Due to recent selloffs, some regional malls REIT stocks have returned poorly, whereas others have been holding better. Simon has been the latter. Following the release of its results on Friday, Simon stocks dropped, but they quickly rebounded. Simon’s Q4-15 funds from operations have fallen in comparison with Q4-14. Also, occupancy dropped by 100 basis points. Despite this result, vacancy levels for malls in general have trended downwards.

The regional malls REITS that have higher sales per square foot have been doing better. Macerich, Taubman, Simon and General Growth average an AFFO multiple of 24x. In contrast, Rouse Properties, Pennsylvania Real Estate, WP Glimcher and CBL & Associates are languishing badly with an AFFO multiple of just 11x.

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As a result of the project change, Taubman’s share price fell for days after the announcement was made. Taubman trades at 27x yield at 3.2%, which is the highest AFFO multiple among its peers.

chart06Source: Taubman Centers, Inc.(NYSE:TCO), Simon Property Group Inc.(NYSE:SPG), General Growth Properties, Inc(NYSE:GGP), WP GLIMCHER Inc.(NYSE:WPG), Pennsylvania Real Estate Inves(NYSE:PEI),The Macerich Company(NYSE:MAC), CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), Yahoo!Finance, Fast Graphs, Brickell City Centre, Miami Worldcenter, Reis

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.

Brookfield Raises the Profile of Malls Again

chart01Brookfield Asset Management surprised investors when they made an unsolicited offer to buy a majority stake in Rouse Properties. Brookfield currently owns 33% of Rouse Properties, and the offer boosted its stock price by 30%. During a week when the equity markets have seen a number of selloffs, this offer is seen as being opportunistic, and its bringing attention to the mall industry which has been seen as a risky and dying industry since the great recession.

Many experts predicted the downfall of malls when GGP, the second largest owner of malls in the US, filed for Chapter 11 bankruptcy in April of 2009. GGP was founded as a small grocery business in Iowa and developed one of the firsts malls in the Midwest in the 1950’s. By 1989, GGP became the second largest owner of malls largely due to the availability of land tracts where big box stores could be developed. This allowed suburban middle class families to shop closer to home and avoid having to go to stores downtown.

Brookfield came to the rescue and made a $2.3 billion investment in GGP’s common stock, resulting in almost 40% ownership of the shares. GGP continued to liquidate some of its assets until January 2012 when Rouse Properties was spun out of GGP as an independent company pursuing its own goals. GGP provided Rouse Properties with 30 Class B malls while GGP focused on its core properties, strengthening its operations and transitioning out of bankruptcy relief. Brookfield remained as a majority shareholder of Rouse Properties.

chart02Malls may be classified as being Class A, B, or C, and these categories are based on the average sale per square feet. Class A malls have the highest rate of sales, and Class C have the lowest rate of sales. This has created a two tiered system of mall REITs with Class A REITs in one category and Classes B and C REITs in a second category. Class A mall REITs have been trading at 25x AFFO, and Class B/C mall REITs have been trading at 12x AFFO. Rouse Properties, which belongs in the Class B/C REITs, are now trading at 15x AFFO after Brookfield announced its offer to purchase a majority stake in the company.

Rouse Properties has asked Brookfield to sign a standstill agreement while they form a special committee to evaluate the proposal. In the meantime, Rouse has hired Bank of America Merrill Lynch to act as an independent financial adviser.

Source: Rouse Properties, Inc.(NYSE:RSE), Brookfield Asset Management In(NYSE:BAM), Fast Graphs, Yahoo!Finance, 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.

U.S. REITs: Last Week’s Selloff & Redemption

chart01It is beneficial to be aware of stock selloffs due to the fact that they are able to provide actual data about the market sentiment regarding certain sectors and stocks. When stocks are dumped in times of desperation, this sends forth a loud message about what investors are thinking in relation to forecast. If this practice becomes a pattern, then this indeed aids in the formulation of investment strategies.

There are fundamentals which are geared to be the foundation for long term investing, while market sentiment can indicate the right moment to enter. Take into consideration, for example, the fact that though we’re not in agreement with the long standing market sentiment against lodging REIT stocks, being aware of it helps to keep us from investing at the wrong time.

On Wednesday, yet another minor selloff was witnessed, it gradually experienced redemption by the end of the week. During the previous week, the Dow Jones ended with being up by 0.7 percent, S&P 500 closed up by 1.4 percent, and the MSCI US REIT Index was up by 1.0 percent. By the third week into 2016, the Dow Jones was down by 7.6 percent, S&P 500 was down by 5.3 percent, while the MSCI REIT US Index was down by 4.3 percent.

It comes with surprise that there has been a loss of some momentum for the lodging selloff movement that commenced in 2015. No single stock had been spared with a nearly 40 percent negative average return for this sector since the end of 2014. This time, two lodging REITs were among the top best three performances, which proved to be FelCor Lodging Trust and Sunstone Hotel Investors.

The sectors with the best performance in the year of 2015, which included data centers and self-storage, emanated displays of weakness and were the leading runners in the selloffs during last week. Between Monday and Wednesday, equity REITs dropped to lower than the average because of these two sectors.

Other sectors that tanked last week were timber and office. By Wednesday, office had fallen by 3.4 percent; however, by the end of the week, this sector was well on the rebound. On the other hand, timber fell by 4.7 percent by Wednesday and did not rise back up. After spiking due to the Weyerhaeuser acquisition last November, the timber REIT Plum Creek share price dropped to pre-merger levels.

Additionally, most free standing retail REITs have demonstrated good returns, with the exclusion of Getty Realty, whose tenants are oil related companies.

Skyrocketing by 32 percent on Friday, Rouse Properties proved to be the stock with the best return last week. The Canadian giant Brookfield Asset Management made an unsolicited buyout offer of $17 per share, which certainly does not come off as a surprise due to the fact that Brookfield has already invested in Rouse and owns 33 percent of it.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Companies: Companies: FelCor Lodging Trust Incorpora(NYSE:FCH), Sunstone Hotel Investors Inc.(NYSE:SHO), Rouse Properties, Inc.(NYSE:RSE), Plum Creek Timber Co. Inc.(NYSE:PCL), Weyerhaeuser Co.(NYSE:WY), Getty Realty Corp.(NYSE:GTY), Brookfield Asset Management In(NYSE:BAM)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on January 22, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of December 31, 2015, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report 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. 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.

Rouse Properties: Is It Worth The Risk?

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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.

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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.

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Takeaway

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

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.​