Malls: All Bad or an Opportunity?

Includes: SKT, SPG, WEFIF
by: Rubicon Associates

On the tape this morning (sourced from Reuters):

Vacancies at U.S. strip malls hit an 18-year high in the fourth quarter and the vacancy rate for large regional malls reached the highest in at least 10 years, according to real estate research firm Reis Inc.

Strip malls -- neighborhood and community shopping centers typically anchored by grocery or drug stores -- had a vacancy rate of 10.6 percent in the fourth quarter, surpassing the high set in 1991, Reis economist Ryan Severino said in a report released on Wednesday. The early 1990s is a period often referred to as the commercial real estate depression.

The deteriorating fundamentals could inflict strong headwinds for real estate companies such as Pennsylvania Real Estate Investment Trust (PEI.N), Macerich Co (MAC.N), Kite Realty Group Trust (KRG.N), Glimcher Realty Trust (GRT.N), General Growth Properties Inc (GGWPQ.PK) and Equity One Inc (EQY.N).

At the same time, it also could provide buying opportunities for cash rich companies, such as Simon Property Group Inc (SPG.N) and Kimco Realty Corp (KIM.N).

Asking rent at U.S. strip malls fell 0.5 percent from the third quarter to $19.12 per square foot in the fourth quarter, or down 2.05 percent for the year. Factoring in months of free rent and the landlord's portion of the cost for interiors, effective rent fell 0.8 percent to $16.75 per square foot, wiping out rent gains over the past nearly four years.

For the first time in Reis' 29 years of tracking the fundamentals of strip malls, effective rent in all of the 77 markets it covers declined.

The vacancy rate at large regional malls rose to 8.8 percent from 8.6 percent the third quarter. It was the highest vacancy rate for U.S. malls since Reis began tracking mall performance. Asking rent fell 0.4 percent to $39.03 per square foot, the lowest since the second quarter 2006.

"This is the first time in almost 10 years of quarterly history thaProfilet Reis has observed rent declines for five straight quarters, and the year-over-year decline of negative 3.6 percent is the largest magnitude of deterioration over a 12-month period on record as well," Severino said.

Yikes, looks pretty bad, doesn't it. So what is a REIT investor to do? While there are ongoing arguments about the value of GGP and SPG's intentions towards same, perhaps the malls are the place to look. The two benchmark mall companies (ex GGP and in my opinion) are Simon (NYSE:SPG) and Westfield (NYSE:WDC) are typically used as proxies for the sector, but if we look a little deeper we might find Tanger Factory Outlets (NYSE:SKT). While not as big as the others (GLA is 9MM sqft vs. SPG's 246MM sqft, GGP's 97MM sqft and WDC's 11MM sqft), the company might be worth consideration.

Who they are:

Tanger Factory Outlet Centers, Inc. is one of the largest owners and operators of outlet centers in the United States. They are a fully-integrated, self-administered and self-managed real estate investment trust, or REIT, which focuses exclusively on developing, acquiring, owning, operating and managing outlet shopping centers. As of September 30, 2009, SKT owned and operated 31 outlet centers, with a total gross leasable area of approximately 9.2 million square feet. These outlet centers were 96% occupied. Also, the company operated and had partial ownership interests in two outlet centers totaling approximately 950,000 square feet.

A little info on the company:

Top 5 Tennants (% of total GLA):

The Gap 8.4%

Phillips Van-Huesen 4.7%

Dress Barn 3.7%

Nike 3.4%

VF Outlet 3.3%

Lease Expirations (% of annualized base rent):

2010 14%

2011 17%

2012 17%

2013 18%

2014 11%

2015 3%

Thereafter: 18%

As of 9/30/09, the company was able to renew leases with a 7.4% increase and re-tennant space with a 29% increase - a combined increase of 13%.

From the above information, we can determine that the company has a diversified tennant base and lease expirations are managable in the coming years as there are no lumpy years. Geographically speaking, the company's highest exposure (on a GLA basis) is to South Carolina at 17% (it should be noted that their combined exposure to CA, FLA and MI is 9%).

Capital Structure:

Senior notes: $256MM down from $390MM 12/31/08

Mortgages: $ 35MM

Unsecured Term Loan: $235MM

Unsecured LOC: $ 54MM down from $161MM 12/31/08 - Lines total $325MM

7.5% preferreds: $ 75MM

Equity: $391MM

9/30/09 Debt:

  • 94% of outstanding debt represented unsecured borrowings and approximately 95% of the gross book value of real estate portfolio was unencumbered.
  • 24.3% debt-to-total market capitalization ratio, compared to 31.2% last year.
  • 9% of our outstanding debt had variable interest rates that were not covered by an interest rate derivative agreement and was therefore subject to market fluctuations.
  • No significant debt maturities until 2011.

Covenant compliance:

Debt to total assets: 36% (well below the 60% cap)

Secured debt to total assets: 2% (well below the 40% cap)

Unencumbered assets to debt: 277% (well above the 135% minimum)

Income avail for debt service: 3.88x (well above the 2x minimum)

The debt (6.15% due 11/15) is illiquid as it is a $250MM issue, but yields north of 6% (+370/5yr mid-market).


SKT has 3MM shares outstanding of their cumulative perpetual preferreds (SKT C). These are obviously high yield (Ba1/BB+) due to the notching and this must be considered when determining the risk profile and suitability. The shares trade at a modest discount to par (around $24 vs $25 par) and have a current yield of approximately 7.75%. Volume is thin - couple thousand a day - so liquidity must be factored in.


SKT has 40MM shares outstanding and trades on the NYSE with a market capitalization of $1.6B (SPG's cap is $22.4B). The shares currently trade at 16x FFO (somewhat (perhaps an understatement) rich to SPG at 12.8x ) and yield around 3.9% (somewhat cheap to SPG and on a 2009 basis). Current price is 4x book (SPG is 5x).

Equity returns over the last year look like this:

While Simon is the 800lb gorilla in the mall space (and deservedly so, as they are best in class), I believe Tanger is worth a look (obviously my analysis here is abbreviated). If you have an economic outlook as I do - consumer retrenchment and weakness on top of economic stagnation net of govt spending - then an outlet center might be a good fit to invest in REIT mall space in a weak environment.

As Steven Tanger stated on the last call "But in good times people like a bargain and in tough times like these they need a bargain".


Disclosure: Long various REIT preferreds but none of the mentioned companies.

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