REITs Get Rich off Mallrats
Nothing can destroy the mall.
Not online shopping. Not high gas prices. Not the housing slump. Not a 129-point drop in the stock market. Each time you think they’re doomed, malls just keep getting bigger and bigger.
Remember when Amazon.com (http://www.businessweek.com/ticker/) was supposed to put all the malls out of business? Didn’t happen. Now, as gas prices and interest rates creep up and home values stagnate, consumers should theoretically spend less on nonessential items like garden furniture at Home Depot (http://www.businessweek.com/ticker/) or high-definition TVs at Best Buy (http://www.businessweek.com/ticker/).
But retailers are plodding along, sustained by a steady job market and a strong stock market. The http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=4361247 (ICSC)-UBS Retail Chain Store Index, a measure of same-store sales, rose 2.5% in May, an improvement from April’s 1.9% drop. For the week ended June 9, same-store sales rose 1% from the prior week and 2.1% from a year earlier.
Both Macy’s (http://www.businessweek.com/ticker/) and JC Penney (http://www.businessweek.com/ticker/) posted sales declines in May, but more upscale stores are faring extremely well—Saks (http://www.businessweek.com/ticker/), which operates Saks Fifth Avenue, reported a 37.5% gain in same-stores sales in May. In early June, preppy retailer J. Crew (http://www.businessweek.com/ticker/) said its first-quarter profit more than tripled. Still Thriving
The ICSC predicts that same-store sales will rise 2% in June, the second most important month of the year for retailers after December, when merchants begin to clear out summer merchandise to make room for fall.
According to the trade organization, national mall sales figures have increased more than 5% in each of the past four years, outpacing general merchandise sales.
“In general, malls haven’t been hurt very much at all [by competition or problems in the economy],” says Murray Shor, publisher of trade magazine Shopping Center Digest. Average mall sales per square foot are now in the $400 range, he estimates. The national average in 2005 was about $340. Because, love it or hate it, the mall is more than a place to buy things, it’s an American institution—one with movie theaters, fine restaurants, and museums. In some places, going to the mall is the social highlight of the week. And as summer kicks off (with a little help from climate change), it becomes a refuge from the sweltering heat. REIT Place, REIT Time
Benefiting from malls’ endurance are real estate investment trusts (REITs)—corporations investing in real estate that are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. Seven of the 10 biggest malls in the country are owned by publicly traded REITs, which get most of their revenue from rent that is determined by monthly sales.
REITs have had an extraordinarily profitable run, beating all major equity benchmarks for the past 3-, 5-, 10-, 15-, 20-, and 30-year periods, according to the National Association of Real Estate Investment Trusts. In 2006, REITs returned 34.35% to investors, versus the S&P 500’s 15.79%. But now, overall REITs are roughly flat for the year as a result of profit-taking and concerns about the slowing residential real estate market and other economic hiccups.
Mall REITs, however, are doing just fine. Returns on regional mall REITs have increased about 3% in the past 12 months, making it one of the three top-performing REIT segments, along with lodging and specialty REITs. The total REIT Index is down 1.6% year-to-date, while industrial, office, and apartment REITs have fallen 1.2%, 1.7%, and 2.4%, respectively.
On May 30, Deutsche Bank (http://www.businessweek.com/ticker/) raised its rating on the regional-mall REITs sector to buy from hold after http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=1560113 and Lehman Brothers (http://www.businessweek.com/ticker/) made a $15.5 billion offer to buy apartment REIT Archstone-Smith Trust (http://www.businessweek.com/ticker/). Less Volatile Market
“After being cautious on the group the past three months as fund flows turned negative and investors pursued other alternatives, we are turning slightly more positive on the heels of the Archstone announcement,” wrote analyst Lou Taylor in a research note. “These stocks have the most meaningful upside potential from current levels to our targets.” Taylor has buy ratings on retail REITs Developers Diversified Realty (http://www.businessweek.com/ticker/), Kimco Realty (http://www.businessweek.com/ticker/), Macerich (http://www.businessweek.com/ticker/), and Simon Property Group (http://www.businessweek.com/ticker/).
“The retail business generally is healthy; tenant demand is good,” said Simon Property Group Chief Executive http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?personId=163663&symbol=SPG during a presentation at REITWeek 2007 on June 6. “Retail real estate tends not to have the volatility in market rents that office does. Everyone gets excited about Manhattan real estate, but if Wall Street sneezes, the $100 [per square foot] that they’re getting today will go down to $70 or $60 in 12 seconds.”
