Dividend Growth Rate Analysis of Six Mall REITs

Includes: CBL, MAC, PEI, SPG, TCO, WPG
by: Zvi Bar

REIT investors tend to invest in the asset class for one of two reasons, if not both:

  1. To gain exposure to real estate as a hard asset that is not highly correlated to the general stock market; and
  2. For the dividend income stream that the REIT model necessitates the trusts pass through to shareholders

By law, REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. This is an analysis of the value and dividend growth rates of 6 REITs within the mall sector. The companies being analyzed, in alphabetical order, are:

  1. CBL & Associates Properties Inc. (NYSE:CBL);
  2. Glimcher Realty Trust (GRT);
  3. Macerich Co. (NYSE:MAC);
  4. Pennsylvania Real Estate Investment Trust (NYSE:PEI);
  5. Simon Property Group Inc. (NYSE:SPG); and
  6. Taubman Centers Inc. (NYSE:TCO)
Retail REITs are sensitive to economic cycles and the strength of the American consumer, because the value of mall space is directly connected to the level of public consumption. A continued economic downturn will undoubtedly weaken the demand for mall property space. Conversely, improving economics should benefit the business.
For example, most malls once had a Sharper Image in them; their bankruptcy lessened the demand for retail space as will any other bankruptcy. Similarly, rent collection rates should go down when consumption goes down, and landlords may become lenient about back rent for fear of losing an irreplacable tenant. Nonetheless, a strong American consumer should result in lower vacancies, improved rent collection rates and new stores (I especially prefer the ones with massage chairs and the food court members that hand out chicken on toothpicks).

The Importance and Limitations of Adjusted Funds From Operations in REIT Dividend Growth Estimations
As a threshold issue, it should be explained that much of the calculations for REIT dividend growth depends upon presumptions about the REITs adjusted funds from operations (AFFO). AFFO can best be described as cash available for distribution. AFFO is most commonly derived by adjusting funds from operations (FFO) for the straight-lining of rents (averaging rent, including scheduled increases, over the lifetime of the lease), and maintaining a reserve for costs that cannot be directly recovered from tenants, such as general maintenance.
These numbers can change dramatically, over time, as some expenses can be significant to a REIT. For example, imagine your local mall needed to buy a new air conditioning unit for the common areas. The cost of such a unit would be significant, let alone its installation. Additionally, some tenants might not be capable of satisfying their lease obligations going forward, especially as their rent increases. Therefore, this analysis is always subject to change based upon future events and actions by the REITs and their tenants.
Many of these REITs saw dramatic reductions in their collected rents since 2007, while their costs have only increased (that air conditioner costs more to run). As a result, many of the mall REITs severely reduced their distributions in the past years. Should tenancy pick up, along with lease prices per square foot, the AFFO should also pick up.
CBL & Associates Properties Inc. (CBL)
  1. Current Dividend Yield: 4.6%
  2. Market Capitalization: $2.7 Billion
  3. Price to Cash-Flow: 5.8
  4. Yield Analysis: CPL’s dividends totaled slightly over $2 per share in 2007 and 2008, but suffered a cut to $0.58 in 2009 (an over 70% decrease). CPL’s total dividends in 2010 totaled $0.80 (about a 38% increase from 2009), and the REIT raised its quarterly dividend by a penny in the most recent quarter (a 5% annualized increase). Thus far, CPL’s dividend growth has been significant. If CPL’s payout can return to its 2006-2007 levels, which it eventually should, the dividend would increase by 138%, and the REIT would yield 11% based on the current price per share.
  5. NOTE: CBL has the lowest price to cash-flow of the six mentioned companies.
Glimcher Realty Trust (GRT)
  1. Current Dividend Yield: 4.3%
  2. Market Capitalization: $912 Million
  3. Price to Cash-Flow: 11.2
  4. Yield Analysis: GRT’s dividends totaled $1.9232 per share in both 2006 and 2007. GRT cut the annual dividend to $1.28 in 2008 (a 33% decrease) and subsequently cut the dividend to $0.40 in 2009 (almost a 70% decrease from 2008 and a nearly 80% decrease from 2007). GRT did not raise its dividend at all in 2010, nor did it yet in 2011. Since the fall, GRT has had zero dividend growth rate.
Macerich Co. (MAC)
  1. Current Dividend Yield: 3.95%
  2. Market Capitalization: $6.5 Billion
  3. Price to Cash-Flow: 29.8
  4. Yield Analysis: MAC is a slight yield anomaly in the mall REIT sector (as is TCO, below). MAC’s annual dividends did not decrease from 2007 to 2008, but instead increased from $2.8225 to $3.0826 (a 9.2% increase). Moreover, in 2009, MAC further raised its annual dividend to a startling $3.7656 in 2009 (a 22% annual increase). Subsequently, MAC did lower its annual dividend to $2.70 in 2010 (a 28% decrease).
  5. NOTE: Given MAC’s high price to cash-flow and 3.7656 high multiple to future AFFO, it appears unlikely that MAC can or should raise its dividend back to or beyond the 2009 level.
Pennsylvania Real Estate Investment Trust (PEI)
  1. Current Dividend Yield: 3.96%
  2. Market Capitalization: $841 Million
  3. Price to Cash-Flow: 7.2
  4. Yield Analysis: PEI’s annual dividend was stable at $2.28 per share from 2006 through 2008. In 2009, PEI slashed its annual payout to $0.74 (over a 67% decrease). In 2010, PEI cut the annual payout almost another 19% to $0.60 per share. The $0.15 quarterly dividend has not yet been altered in 2011. Nonetheless, PEI appears to have a relatively strong balance sheet, with a below average price to book compared to its sector (a more conservative mall REIT). As a result, it appears that PEI is capable of soon starting to increase its dividends, but is likely waiting for the business to further improve.
  5. NOTE: PEI has the lowest price to book value of the six mentioned companies
Simon Property Group Inc. (SPG)
  1. Current Dividend Yield: 2.77%
  2. Market Capitalization: $34.2 Billion
  3. Price to Cash-Flow: 19.1
  4. Yield Analysis: After growing its annual payout by about 10% per year from 2006 to 2008, in 2009 SPG had to cut its annual payout from the $3.5728 2008 level to $1.5237 in 2009 (an over 57% decrease). Subsequently, the dividend bounced back, sharply, to $2.60 in 2010 (a 70% increase). Based on the current quarterly dividend rate (and assuming no increase this year), the 2011 total payout is $3.20 (a 23% increase from 2010). Assuming SPG institutes dividend growth levels consistent with prior practices, SPG’s payout will likely reach a new high in 2012 or 2013. Nonetheless, at about 19x cash-flow, too significant of a dividend increase is unlikely and also likely unreasonable.
  5. NOTE: SPG is the largest mall REIT on this list, and an aggressive grower. Further, unlike many of the smaller mall REITS, it has international exposure.
Taubman Centers Inc. (TCO)
  1. Current Dividend Yield: 3.09%
  2. Market Capitalization: $3.2 Billion
  3. Price to Cash-Flow: 11.6
  4. Yield Analysis: TCO is the only company on this list that did not have a lower year over year payout within the last five years. In 2007, TCO’s dividend was $1.54 (almost a 20% increase from 2006). TCO’s yield grew to $1.66 in 2008 (a 7.7% increase) and maintained the payout at that rate in 2009. In 2010, TCO’s dividend grew to $1.8659 (a 12.4% increase), including an increase at the very end of 2010.
  5. NOTE: TCO is less prone than most REITs to substantially grow its portfolio than to improve the quality and return of its already existing properties.
Based purely on prior yield growth rates and presumed future yield growth CBL, MAC, PEI and SPG appear to be better options than GRT and TCO. Of the remaining 4, MAC and SPG have fairly high valuations relative to their cash-flow. Given the need to maintain reserves, mall REITs with a higher price to cash-flow may need to withhold from further raising dividends in order to maintain appropriate cash reserves. As a result, CBL and PEI appear to be better values, where CBL has the lowest price to cash-flow and decent dividend growth, and PEI has the lowest price to book value and the most likely prospect of a future dividend increase.
Please share your opinions on these mall REITs or others you believe comparable and/or superior.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Data is derived from Morningstar and/or Yahoo Finance. Yield is but one consideration in choosing an investment, and each investment should be considered relative to the total portfolio.

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