Mall REITs: Only The Strong Shall Survive

Feb. 15, 2018 7:53 AM ETCBL, BPYU, IYR, MAC, PRET, SKT, SPG, TCO, VNQ, WPGGQ, BAM, BN:CA27 Comments

Summary

  • The stars aligned for a blowout holiday shopping season, and it delivered. Shoppers returned to brick-and-mortar retailers, sending sales higher by 4-6% above 2016.
  • The strong holiday season, however, came after a rough year for retailers. For the first time since the end of the recession, more stores closed than opened in 2017.
  • The flurry of store closings fueled a profoundly negative narrative that surrounds brick-and-mortar retail. While “bad news” makes headlines, the strong underlying data is becoming hard to ignore.
  • The bifurcation between top-tier and lower-tier mall REITs continued in 4Q17. High-productivity mall REITs reported another solid quarter, while lower-productivity malls continue to struggle.
  • To the victor go the spoils. While top-tier malls continue to enjoy solid fundamentals and a pathway for continued growth, lower-tier malls are in an all-out fight for survival.

REIT Rankings: Malls

In our REIT Rankings series, we analyze one of the fifteen real estate sectors. We rank REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives.

mall REITs

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Mall REIT Overview

Mall REITs comprise roughly 12% of the REIT Indexes (VNQ and IYR). In our Hoya Capital Mall REIT Index, we track eight malls, which account for roughly $90 billion in market value: CBL & Associates (CBL), GGP, Inc. (GGP), Macerich Co. (MAC), Pennsylvania REIT (PEI), Simon Property Group (SPG), Tanger Factory Outlets (SKT), Taubman Centers (TCO) and Washington Prime Group (WPG).

Above we note the characteristics and strategy of each mall REIT. More than other sectors, it's critical to note the "quality focus" of these REITs. There has been a significant divergence in fundamentals and stock performance between higher-productivity malls and lower-productivity malls since the end of the recession.

Top-tier malls, as measured by tenant sales per square foot, continue to perform well across all metrics including tenant sales, average rent, and occupancy. Downsizing retailers have focused their investment into higher-performing stores and have continued to close weaker-performing stores in lower-tier malls. Amid the unusual binge in retail bankruptcies in early 2017, this bifurcation in performance has accelerated.

Recent Developments and Performance

Mall REITs were among the weakest performing real estate sectors in 2017, dropping 2.7% for the year compared to a 5.2% total return for the REIT index. 2018 hasn’t been too kind to mall REITs so far, either. Malls have fallen in synchrony with the broader sell-off in income-oriented

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