Since I started my musings, I have often compared MLPs to REITs and wondered why, with similar fundamentals, REITs are up big and MLPs are down big. I haven't gotten a satisfactory answer, though one institutional fund manager just said "we just don't think they fit in an infrastructure fund". That's for another day.
However, one sector of the REIT world, mall REITs, is not like the others. So, we go to our mythical investor on Mars, and ask him, from his perspective, what's the difference between mall REITs and MLPs, and he would look at the only observable input from Mars, the price chart. This is what he would see:
(Note: price return only)
Our extra-planetary friend would likely say: "these are both highly distressed sectors. The market thinks they are in BIG trouble."
Well, for the mall REITs, as I have written about, and more erudite authors on SA alpha have weighed in, are going through a very painful restructuring. And both bulls and bears would both agree that it isn't going to be pretty, lots of tough waters ahead (per my previous blog, being a glutton for punishment, I am getting interested in the group and lean to the bull side, but given the beating I am taking in MLPs, I'm going to watch from the cheap seats with a couple of small positions).
The lower quality mall REITs are fighting a big headwind such as mass retail closures (Sears, Payless, DressBarn, etc) and more to come (JCP, Ascena, etc). They have been through this before, but there are malls that are failing on a monthly basis - some mall REITs are putting the proverbial mall keys in the mailbox and walking away in default ("returning to lender" is the polite term).
It is probably one of the more challenged sectors out there fundamentally, with vacancies up and cash flow down, malls in need of massive CapEx, and debt covenants looming. Some of these malls have 7x debt/EBITDA, so it will be a close call! Many will restructure their debt. Mall bankruptcies are rare but can happen. Will we get some this time? That's for people smarter than me. The point here is that malls ARE in a very tough spot right now.
By inference, one could be forgiven to say that pipelines are too. Our friend on Mars certainly thinks so. However, here on Earth, things don't look so bad. Earnings season wrapped up seeing the majority have strong earnings, with nice y/y growth in DCF and in many cases, dividends. Meanwhile, leverage levels are at low levels rarely seen in infrastructure sectors (4x) and equity issuance is almost non-existent. The only blemish, and it's a big one, is that pipeline managements still would rather spend on new projects than return the capital to shareholders (hint hint!). They promise "next year" and if the environmentalists get their way, building a pipeline will be impossible - so we'll get that return of capital one way or the other. But that has not happened yet, so we will put that in the negative column. Others have written convincing pieces that it will.
Still, investing in a new pipeline that returns 10% is not a horrible use of capital, probably modestly accretive, unlike other sectors (eg e-commerce) where that capex is lighting money on fire. But tempting as that is, I won't digress.
So, why is the market treating pipelines like they are mall REITs, clinging to their last anchor tenant? Does the market really believe that oil and gas output will decline, even if the E&Ps go under? We saw this scare in 2015 and it didn't happen. If an E&P is in trouble, they usually pump MORE not less.
Last week I compared E&Ps to MLPs, and this week it's mall REITs. One can only conclude that the market thinks the pipelines will have to completely restructure (again). If you don't agree, you are getting the deal of a lifetime.
Disclosure: I am/we are long KYN.
Additional disclosure: I am long a bunch MLP CEFs.