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Mall REITs: Update On My Best Pick For 2018 - Choosing The Best Operators

Mar. 07, 2018 7:11 PM ETCBL, PRET, WPGGQ, BPYU, MAC, SPG, TCO45 Comments

Summary

  • Mall REITs have underperformed the broader market to start 2018.
  • Not all mall REITs are created equal: the high quality "A malls" are my preferred way to invest in the sector.
  • These mall REITs trade at a 50% discount to the S&P 500.
  • As the interest rate environment is changing for higher interest rates, I have repositioned my portfolio towards lower leverage and stronger management.

Summary and Thesis

My most contrarian positions, Simon Property Group (SPG), Macerich (MAC), GGP (GGP), and Taubman (TCO), represent mall REITs owning “A malls,” otherwise known as high quality mall properties. Whereas I have no doubt that Amazon (AMZN) and e-commerce will take down low quality malls found in peers CBL Properties (CBL) and Washington Prime (WPG), my thesis is that high quality malls will continue to thrive through “business as usual” rent increases and anchor redevelopments. In light of the increased market risk and rising interest rate environment, I am adjusting my positions to emphasize the better operators. It’s time to go to the mall.

Since picking A mall REITs as my top pick for 2018, returns have thus far been disappointing:

(Yahoo Finance)

Financial results for 2017 closed on a high note - yet why isn’t the market revaluing these shares?

This makes me remember the episode “Slap Bet” from the television series “How I Met Your Mother” where Robin reveals her music video from childhood called “Let’s Go to the Mall!”

With mall valuations continuing to trade at opportunistic levels, what can I say, it’s time to go to the mall!

(How I Met Your Mother Wiki)

Strong financial results continue due to best of breed assets

2017 sales per square foot has remained strong (note: GGP’s sales psf is NOI weighted):

(Chart by Author, data from SPG, MAC, GGP, TCO 2017 Q4 supplementals)

These numbers are much higher than that of the struggling B malls, which reported sales per square feet below $400.

Occupancy rates have remained high - with the strongest results being Taubman’s occupancy increasing 0.9% from the previous year:

(Chart by Author, data from SPG, MAC, GGP, TCO 2017 Q4 supplementals)

Strong financial results and guidance

2017 same store net operating income growth

This article was written by

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Julian Lin is a top ranked financial analyst. Julian Lin runs Best Of Breed Growth Stocks, a research service uncovering high conviction ideas in the winners of tomorrow. 

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Analyst’s Disclosure: I am/we are long SPG, GGP, MAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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