Recently, Glimcher Realty Trust (GRT) conducted a survey about consumer shopping preferences. In this survey, 50% of respondents said they shop in both the mall and online, 30% shop only in malls, and 20% said they shop only online. Meaning, despite the long-held belief that physical retail will die because of online competition from the likes of Amazon (AMZN), the vast majority of customers still prefer to have some sort of physical/social experience. After all, online shopping is essentially just a catalogue on steroids -- more selection, easier comparisons, etc -- but the fundamental advantage of price and convenience remain the same. At its height, catalogue shopping totaled $58bn, or 6% of total retail, and today that number has barely budged to $142.5bn, or 8% of total retail.
However, this does not mean that retailers can ignore the threat of online shopping -- they must offer a more compelling experience in order to draw in customers. In the same study cited above, consumers said they prefer an immersive shopping experience, one that can offer both entertainment, food, and shopping, in a word, a mall.
In this article, I will examine the six largest mall REITs in the USA, and try to highlight some of the risks and potential upside in each. Using specific metrics, I will try to point out what investors should look at when investing in REITs in general, and mall REITs specifically.
When looking at the attractiveness of Mall REITs one number reigns supreme -- sales per square foot. This number measures not the quantity of space, but the quality of the space. A mall that generates significantly higher sales per square foot speaks to the success of the mall, and as such the ability for the landlord to charge higher rents. Secondly, malls generate revenue not only from rent paid by tenants, but also from "overage" or "percentage" rent, meaning, landlords get a share of tenant revenue. While this number pales in comparison to the rent landlord receive from tenants, it does provide landlords with important secondary revenue streams. The following table presents sales per square foot from the largest US based mall REITs:
Sales Per Sq Ft
General Growth (GGP)
Using this table alone, we would conclude that Taubman presents the best opportunity in the mall REIT space. Obviously, we need to take many other factors into consideration, let's start with size:
Sq Ft (in 000's)
Aside from the quality of the space, the quantity can determine the attractiveness for certain investors. The larger the quantity, the greater amount of diversification investors have, thus lowering overall risk. Personally, I don't find this argument too compelling. True, a company with more space has greater diversification, but we must ask do investors gain beyond a certain point? To illustrate, if you have two people taking a test, one studies for one hour and gets a 95 and the other studies for 12 hours and gets a 100, true the one who got a 100 did better, but at what cost? Studying an extra 11 hours for five points hardly seems worth it. Here, too, by investing in SPG instead of Taubman you get a lot more exposure, but do you gain by adding so much more exposure? However, even more to the point -- tenant diversification probably provides a better measure for actual diversification than location diversification. In this realm, both SPG and TCO have significant tenant diversification which shields investors from potential vacancies, and subsequent cash flow problems.
Despite this love song to TCO, it does carry high risk in another area we need to examine -- debt. In the next section, we will examine the debt of the above companies, and use it to further evaluate the attractiveness of the above REITs.
The following table presents the debt per square foot of the above REITs. I use debt per square foot as opposed to total debt, because it gives the best relative understanding of total debt.
Debt Per Sqft
We need to take this metric into account. It goes without saying that everyone thinks they have control of their debt, no matter the size, but when the bells begin to toll things can get messy. We need to look no further than GGP, which had the fortune of having its debt come due during the financial crisis of 2008 and needed to enter bankruptcy protection to sort everything out. Therefore, while Taubman gives investors the highest quality retail, it also carries the highest debt load, increasing the risk of ownership.
All of these measurements -- sales per square foot, size, debt level -- all stand somewhat besides the point. Even if Taubman had the highest in each of these measurements, it does not have an infinite value, you need to get a decent price. In the next section, I will examine the above REITs using the best value measurement -- price/ffo.
Price To FFO
As many of you know, REITs need to pay out 90% of their profits in the form of dividends. This figure misleads many because part of the profit calculation includes many non-cash charges, most notably depreciation. In fact, many REITs, including Glimcher, operate at a loss because of these (and other) charges. Therefore, when evaluating REITs, we need to use a better valuation tool -- funds from operations. This number takes out non-cash charges and the effect of gain or loss from sales of properties. This figure then gives us the most accurate current picture of the performance of the REIT.
FFO is drawn from FY 2012 numbers, and the prices from June 5, 2013. We see from here two interesting points. First, CBL -- by far the cheapest REIT -- also has the lowest sales per square foot. Second, Taubman -- the most expensive -- has the highest sales per square foot. We see from this, as I said above, that sales per square foot presents the single best tool for evaluating the quality of the REIT. However, as we mentioned Taubman's advantage gets blunted because of its high debt load per square foot.
One final point, I think MAC and GRT, represent the least remarkable of the above companies. The trade at an average FFO, debt level and sales per square foot -- not distinguishing themselves in any of these areas. SPG distinguishes itself because of its size, and GGP has a very low debt level, allowing itself room to grow. However, even with its expensive price tag, and high debt, I personally like Taubman because the higher quality space will usually outperform in good times, and maintain better performance in the down times. The debt remains a lingering risk, but I would personally take that risk in exchange for the quality of the Taubman product.
I would like to make two final points -- one macro and one micro. On a macro level, prices of REITs have been run up by investors looking for yield in the face of the Fed's quantitative easing. Since late 2008, the Dow Jones REIT index has risen by 155%, compared to 86% for the S&P 500. With the continuing talk of a Fed "taper" of its QE program, we could see a flow of capital back into bonds, and away from yield products like REITs, sending asset prices lower.
On a micro level, the past couple of weeks have brought a slew of positive news for Tesla (TSLA). It received the highest ratings in history from consumer reports, announced its first profitable quarter, and dramatically expanded its supercharger network. What does this have to do with mall REITs? Interestingly, out of the seven current charging stations, two of them -- in Folsom, CA and Gilroy, CA -- are located on Simon Property Group's properties. And a third one is planned on another SPG property in Woodburn, Oregon. This has a double effect -- first, considering Tesla's ambitious rollout plan, SPG could leverage its current relationship to expand more of Tesla's supercharge stations onto other properties. Second, Tesla's car -- at average MSRP of $90,000 -- caters to a higher end customer. These customers who charge their cars at supercharge stations located on SPG properties will undoubtedly also shop at these properties, providing incremental, but important gains for SPG. While this factor isn't critical, it is interesting to note, and shows us how mall REITs can continue to drive traffic.