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.

Taubman Centers – One Step Back To Take Two Steps Forward

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By the end of 2013, Taubman Centers (NYSE: TCO) had expanded its portfolio to a high of 25 shopping centers. Since that time, the company has significantly downsized by selling seven of those centers to an affiliate of the Starwood Capital Group. This reduction in the size of their core portfolio impacted the company’s metrics both negatively and positively.

Negative Impacts
  • Funds from operations per share decreased by 10 percent (Q1-2015 vs. Q1-2014), as opposed to increases in the cash dividend distribution as well as the dividend payout.
  • Occupancy rates in their current portfolio have decreased.

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Positive Impacts
  • Combined average rent per square foot, sales per square foot, and mall tenant sales have all increased. This is a direct reflection of Taubman Centers’ goal to focus on their most productive centers.
  • The Debt-to-Market Capitalization ratio has been reduced as a significant portion of the sales revenues was used to retire debt early.
  • Investors received a special dividend of $4.75 per share, equivalent to a 6.2 percent yield, a benefit from the sale to Starwood Capital Group.
  • Taubman Centers maintains a diversified portfolio of tenants for revenue generation. The company’s largest tenant, Forever 21, generates just 5.1 percent of mall Gross Leasable Area (GLA).

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Although the proceeds from the sale of the 7 centers were employed to retire debt and pay cash dividends, the company is very interested in growth. Management anticipates there will be new development opportunities enabling the company to build a new center, on average, every two years. Taubman Centers recently opened a new mall in San Juan, Puerto Rico, and they expect to open another one in Honolulu, Hawaii next year. In addition to traditional malls, the company is also targeting outlet centers.

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Similar to Taubman Centers’ peers in the retail space, the company experienced the effect of tenant bankruptcy. In 2014, tenants accounting for 1.6 percent of leases filed for bankruptcy compared to just 0.3 percent in 2013. The company realizes this might lead to lease termination and a reduction in cash flow so they had an annual provision for accounts receivable loss equivalent to 0.4 percent of total revenues in 2014.

The company’s valuation metrics include a Price-to-FFO ratio of 23.2, much greater than its historical average and peer group’s median, and a dividend yield of 3.0 percent that is lower than its peer group. Check peer comparison here.

In summary, Taubman Centers is a solid company but with FFO falling and a high valuation. It is not the right time to buy.


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.​