Growing Dividend REITs

GGP

Bloomberg has reported that the mall REIT General Growth Properties has failed to make a $144 million payment earlier this month on a mortgage associated with Lakeside Mall in Michigan.  As a result, the mortgage has been transferred to a service provider that specializes in handling troubled commercial mortgages, which should come as concerning news to not just General Growth Properties investors but also other investors in other mall REITs. 

Based on the latest financial statements released by General Growth Properties, Lakeside Mall is one of its bottom performers, as shown by the fact that it has an 85 percent occupancy rate compared to the average of a 96 percent occupancy rate for the mall REIT.  However, it is curious that General Growth Properties has failed to make the payment because it should have no problems doing so, based on a relatively manageable debt level as well as relatively few debt obligations until 2018. 

So far, General Growth Properties has not provided an explanation for its choice, whether because Lakeside Mall’s fair value was not worth the mortgage or something else.  As a result, there is rampant speculation, with some people suggesting that it might not be an isolated case but a problem with mall REITs as a whole. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

Macy’s, J.C. Penney, and Wal-Mart are some of the retailers that are closing stores, prompting fears that now is not the time to invest in mall REITs.  For example, Chris Versace, a writer for the Eagle Daily Investor, has stated that anchor store closings and the rising number of online sales are changing how retailers operate, meaning that people should not invest in mall REITs until the resulting wave of store closures have come to a conclusion. 

Are These Concerns Warranted? 

There are reasons to believe that fears about mall REITs are overblown.  For starters, some stocks have been performing better than others, meaning that there is still hope in the form of REITs with high sales per square foot such as General Growth Properties, Macerich, and Simon Property Group.  Also, REITs are still planning new malls, which they probably wouldn’t be if the prospects were really so bad.  Mall vacancy rate has been trending downwards since the great recession. 

In fact, these companies have been performing better than the average equity REIT.  Their dividend yields have been lower, usually an indication that things are going in their favor.  As another point of view, WP GLIMCHER and CBL & Associates Properties are offering higher-than-average dividend yields because they have suffered from tenant bankruptcies and store closures with corresponding consequences for their own financial states and share prices. 

It is worth mentioning that the concerns over store closures have been exaggerated.  For example, Macy’s opened 26 stores even as it closed 40 stores in 2015, suggesting that the problem wasn’t across the board but concentrated in particular locations.  Similarly, both Macy’s and J.C. Penney have pointed out the positive correlation between brick-and-mortar stores and their online counterparts that exist because people are able to browse and return products that they buy online.  In other words, the conclusion that the rising number of online sales is causing an industry-wide problem for mall REITs is suspect because the evidence shows that having both an online and offline store actually drives up sales rather than drive them down. 

Further Considerations

Summed up, it is debatable that mall REITs should be avoided because of the rising number of online sales and stores closures.  However, interested individuals should remember that successful investing is based on a lot of hard work, meaning that they should not take this as an endorsement to invest in mall REITs at random without putting in the necessary time and effort. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

Here’s a quick look at how the 21st century retail business model works.  First, you open an online store because it’s so cheap (today, you don’t even need your own website).  Next, you sell as much as you can and use the profits to build huge warehouses where you both store your inventory and finish off your brick and mortar competition.  Finally, you open up physical stores for better logistics.  If somebody had told you this is how things would work fifteen years ago, you wouldn’t have believed it.  However, this is the way things are going. 

Amazon is a newcomer to the brick and mortar world.  Last week they left many people scratching their heads when the CEO of a regional mall REIT, General Growth Partners, allegedly disclosed Amazon’s plans to open anywhere from 300 to 400 bookstores in the US.  Later, in an effort to fix the confusion, the CEO stated that he had never meant to speak on Amazon’s behalf.  However, given that Amazon said there’s no immediate plan, one can always assume that there’s something along these lines in the works. 

Investors have been well aware that Amazon has been trying their hand at brick and mortar stores.  This time last year, Amazon opened its first physical “bookstore” at Purdue University in Indiana.  In fact, the store didn’t have any visible inventory, but it was a place where you could order online and pick up your merchandise in the “store”.  Last fall, Amazon has also opened a physical store in Seattle, which does have visible inventory. 

purdue.amazon.com

The bankruptcy of Borders, a bookstore with locations across the nation, in 2011 still remains fresh on the minds of investors.  People have become convinced that physical stores are a thing of the past.  With Kindles everywhere and a humongous online library, why would you even bother with building a chain of bookstores?  Some people, however, see a lot of value in the brick and mortar store proposition, mostly related to delivery.  Here are a few situations where they would be useful:

You don’t want your package delivered to your doorstop. 

You don’t want to wait and prefer to pick up your purchase in a nearby store. 

Amazon wants to reduce dependency on shipping companies. 

To return merchandise, it’s much easier to go directly to the store than the post office. 

Stores can function as local warehouses to deliver in the neighborhood by land or using drones. 

There’s no doubt that the bookstore giant Barnes & Noble is now doubly scared.  In addition to competing with Amazon online, it is now likely to have to fight Amazon with physical space.  In fact, shares plummeted by 10% when the possible plan was made public, but went back up. 

So, what does this have to do with REITs?  The fact that a mall REIT operator was the source leads to speculations about lease negotiations with Amazon.  Like Apple and other online companies, Amazon could very well begin to show up in American malls. 

It’s never too late to see a revenge of the malls.  The same companies that have prompted specialists to pronounce the slow death of malls in America, while also creating an entire generation of people questioning why malls even exist, have now become their tenants.  After all, as far as I’m concerned, stores may have become digital, but people still need a physical place to hang out. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

Last Friday, some investors in the financial markets were disappointed at the Q4-2015 results of Simon Property Group, a huge regional mall REIT ($58 billion market cap), but in the world of brick and mortar, that may not be the case.  Simon looks to have beaten Taubman Centers’ ($4 billion market cap regional mall REIT) plan to open an enclosed shopping mall in downtown Miami.  Taubman is instead settling for a high end retail street. 

Along with Miami Worldcenter Associates and Forbes Company, Taubman intended to construct a 765,000 square foot mall which was fully enclosed.  While retail, dining and entertainment were to be key, over 40% of the mall was set to be dedicated to Bloomingdale’s and Macy’s.  Included in the plan was a pedestrian-only street which featured multiple restaurants and shops on 7th street, which led directly to the American Airlines Arena.  A press release on Jan 11 stated that the mall project had been discarded, and in its place would be a high end retail street, positioned south to north between 7th and 10th streets. 

Simon planned to construct an open-air shopping center simultaneously in downtown Miami.  The luxury mall is to be 500,000 square feet, and complete with high-end retailers along with plenty of dining and entertainment facilities in the Brickell neighborhood.  Part of the project has already been finished and is to open this year.  Local developers have been developing the project with Simon.  Both projects are mixed-use and also include offices, hotels and residences. 

Taubman’s decision strikes many as yet another signal that the idea of a mall no longer works in America.  Cities have become increasingly urbanized and, along with the growth of online shopping and the boost to high street shopping, malls have become marginalized.  But while Taubman is looking to expand overseas, and in particular to Asia, it’s unlikely that they will scrap future mall projects in the U.S. This scenario appears to be just a downtown Miami battle between two competitors. 

Due to recent selloffs, some regional malls REIT stocks have returned poorly, whereas others have been holding better.  Simon has been the latter.  Following the release of its results on Friday, Simon stocks dropped, but they quickly rebounded.  Simon’s Q4-15 funds from operations have fallen in comparison with Q4-14.  Also, occupancy dropped by 100 basis points.  Despite this result, vacancy levels for malls in general have trended downwards. 

The regional malls REITS that have higher sales per square foot have been doing better.  Macerich, Taubman, Simon and General Growth average an AFFO multiple of 24x.  In contrast, Rouse Properties, Pennsylvania Real Estate, WP Glimcher and CBL & Associates are languishing badly with an AFFO multiple of just 11x. 

As a result of the project change, Taubman’s share price fell for days after the announcement was made.  Taubman trades at 27x yield at 3.2%, which is the highest AFFO multiple among its peers. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

Brookfield Asset Management surprised investors when they made an unsolicited offer to buy a majority stake in Rouse Properties.  Brookfield currently owns 33% of Rouse Properties, and the offer boosted its stock price by 30%.  During a week when the equity markets have seen a number of selloffs, this offer is seen as being opportunistic, and its bringing attention to the mall industry which has been seen as a risky and dying industry since the great recession. 

Many experts predicted the downfall of malls when GGP, the second largest owner of malls in the US, filed for Chapter 11 bankruptcy in April of 2009.  GGP was founded as a small grocery business in Iowa and developed one of the firsts malls in the Midwest in the 1950’s.  By 1989, GGP became the second largest owner of malls largely due to the availability of land tracts where big box stores could be developed.  This allowed suburban middle class families to shop closer to home and avoid having to go to stores downtown. 

Brookfield came to the rescue and made a $2.3 billion investment in GGP’s common stock, resulting in almost 40% ownership of the shares.  GGP continued to liquidate some of its assets until January 2012 when Rouse Properties was spun out of GGP as an independent company pursuing its own goals.  GGP provided Rouse Properties with 30 Class B malls while GGP focused on its core properties, strengthening its operations and transitioning out of bankruptcy relief.  Brookfield remained as a majority shareholder of Rouse Properties. 

Malls may be classified as being Class A, B, or C, and these categories are based on the average sale per square feet.  Class A malls have the highest rate of sales, and Class C have the lowest rate of sales.  This has created a two tiered system of mall REITs with Class A REITs in one category and Classes B and C REITs in a second category.  Class A mall REITs have been trading at 25x AFFO, and Class B/C mall REITs have been trading at 12x AFFO.  Rouse Properties, which belongs in the Class B/C REITs, are now trading at 15x AFFO after Brookfield announced its offer to purchase a majority stake in the company. 

Rouse Properties has asked Brookfield to sign a standstill agreement while they form a special committee to evaluate the proposal.  In the meantime, Rouse has hired Bank of America Merrill Lynch to act as an independent financial adviser. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

Regional mall REITs have suffered due to weak Q3 results and sales forecast from major mall-based retail stores.  This has caused an underperformance in share prices for the month of November.  The entire regional mall REIT sector returned negative results, with a median return of -8.1 percent.  Leading the drop was General Growth Properties with a decrease of 12 percent. 

In general, the brick and mortar retail shopping industry has been negatively affected due to the change in consumers habits related to e-commerce.  A perfect example is Best Buy.  Oftentimes consumers will go to their stores to research physical products, and then end up purchasing them on Amazon.  That being said, we should not expect that behavior to be the new norm. 

Through the years, we have witnessed many large retailers moving to e-commerce platforms.  Macy’s is a good example.  On the other hand, online retailers, such as Apple and Microsoft, have opened brick and mortar stores.  In addition, there are companies that employ strategies of crossing channels.  For example, consumers make the purchase online, and then pick up the items at the store.  This presents retailers with the ability to sell them additional products while physically at the location. 

Regional mall REITs continue to grow on par with other average REITs.  Since there have no recent indications of a major change in trends, the share drop appears to be a minor hiccup.  Besides, the drop was not large enough to make the fastest growing REITs less valuable. 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours. 

General Growth Properties (NYSE: GGP), with its $25 billion market capitalization and ownership of 25 percent of America’s 425 high-quality regional malls, is one of the greatest powerhouses in the regional mall REIT space.  However, because much of its capital has been reinvested, it has a relatively low dividend yield of 2.4 percent with a current dividend payout of 53 percent. 

In terms of General Growth’s operations, the results for the first quarter of 2015 have been strong.  The initial rents for leases that began occupancy this year were 8.7 percent higher than the final rents paid on expiring leases.  Same-store net operating incomes, funds from operations and dividends have increased by three, five and thirteen percent respectively.  No less impressive are the projected results for the year as a whole: Both FFO per share and dividends are expected to increase by eight percent. 

Since 2010, General Growth has reinvested much of its funds: Out of $7.2 billion, they have invested:

$2.1 billion in development, with over eighty percent invested in Class A malls and expected average returns of approximately nine to eleven percent;

$2.8 billion in acquisitions; and

$2.3 billion in stock and warrants repurchases. 

The business owns 129 retail properties all over the United States that cover a total of approximately 127 million square feet of gross leasable area. 

Debt profile has improved:

4.11 percent weighted average interest rate

85 percent of debt being fixed interest rate

~7-year weighted average remaining term to maturity. 

Despite having solid, high-quality assets, General Growth’s valuation has been high.  Its price-to-FFO multiple has reached almost 23, one of the highest among its peers.  A stock to keep in the watchlist, but it is not a good time to enter at the moment. 

Source: Genera Growth Properties

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication.  No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment.  Please do your own due diligence before making any investment decision.  Some information presented in this publication has been obtained from third-party sources considered to be reliable.  Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. 

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​