(credit Brad Thomas, Forbes)
Historically, REIT yields have exceeded dividend yields of most publicly traded stocks, making them ideal for an individual retirement account (IRA) or other tax-deferred portfolio. Their actual dividend yields tend to be somewhat correlated with – and generally higher than – yields on 10-year U.S. Treasury bonds.
It is the dividend consistency (of the REITs) that attracts most investors and the reliability of the income is measured by consistency and sustainability. In 2010, REITs paid out over $18 billion in dividends and that portion of total returns represented around 60 percent of the industry’s average total return (or around 13.75 percent). (Source: NAREIT)
Ideally, REITs are able to generate dividends and grow capital and the notion of taking “two bites of the apple” is a compelling reason to consider this fixed-income alternative. Conversely, the attraction to the increasingly popular REIT sector is distinguished by the consistency of the dividends that anchor the total return component and provide investors with that necessary margin of safety.
The growing strength of the retail sector – especially the upscale sector – bodes well for Regional Malls. This retail sub-sector has rebounded in part due to strong balance sheet management and inventory controls by the large retailers. Also with very limited new development and weaker centers flushed out by the recession, the demand for space has increased and that has provided mall owners with enhanced occupancy margins.
Today there are around 1,400 malls in the United States and as the cost of building a new mall can easily reach $100 million or more, overbuilding within a geographic area is rare and provides for a risk-aligned demand. This, along with excellent locations and moderate but steady growth in retail sales, reduces risk and provides for predictable and growing cash flows.
The FTSE NAREIT regional mall sub-sector is comprised of eight REITs with a combined market capitalization of $83.626 billion with an average dividend yield of 2.85 percent (as of September 28, 2012). These mall REITs include CBL & Associates Properties, Inc. (CBL), Simon Property Group (SPG), General Growth Properties (GGP), Taubman Centers (TCO), Macerich Company (MAC), Pennsylvania Real Estate Investment Trust (PEI), Glimcher Realty Trust (GRT), and Rouse Properties Inc. (RSE).
Reis Inc. reported that regional mall vacancy rates in the U.S. fell to 8.7 percent in the third quarter, down from the 8.9 percent vacancy rate posted at the end of the second quarter, which could bode well for the regional mall space as a whole.
SNL Financial reported that median occupancy for SNL-covered U.S. regional mall properties is currently at 94.2 percent, down from a median of 94.9 percent at the end of the second quarter. Median occupancy for these assets was as high as 95.5 percent at the end of 2011, but has trended below 95 percent since then.
Reis also reported that mall rents moved up 30 basis points in the third quarter to $39.24 a square foot. This was the fifth consecutive quarter of growth in mall rents.
On a total-return basis, regional mall REITs have outperformed the broader REIT market over the last year, with a one-year return for the SNL Regional Mall REIT index of 47.8 percent, versus 33.7 percent for the SNL U.S. REIT Equity index, as of Oct. 1.
Regional mall REIT yields are currently lower than the broader REIT market, with the dividend yield for the SNL U.S. Regional Mall REIT index at 2.85 percent as of Oct. 1, compared to 3.40 percent for the SNL U.S. REIT Equity
As evidenced by the growing occupancy rates as well as the growth in mall rents, Regional Malls are continuing to provide strong sector total returns. As explained by Jason Lail with SNL Financial:
Regional mall REITs look to be lagging behind the broader REIT market on some fundamentals, with a median FactSet projected FFO growth for 2013 of 6.5 percent, compared to a median of 8.3 percent for all equity REITs. Regional mall REITs posted median same-store NOI growth of 3.0 percent for the second quarter of 2012, compared to 3.1 percent for the broader REIT market. Regional mall REITs also ended the second quarter with median leverage of 45.8 percent, compared to 36.1 percent for all equity REITs. On the other hand, regional mall REITs saw second-quarter FFO per share grow by a median of 12.8 percent year over year, while the median of FFO-per-share growth among all equity REITs was 7.7 percent.
Mall REITs That Stand to Outperform
From the list of mall REITs, I like Taubman Centers and Macerich Company. They are both likely to see continued growth and the dividends are as steady as the traffic in the parking lots.
Taubman Centers has a market cap of $4.77 billion (current price of $77.36) with a current dividend yield of 2.39 percent. The luxury mall REIT has the highest sales per square foot in the sector and Taubman is the only mall REIT that did not cut its dividend during the great recession. The latest (Q2-12) occupancy rate is 89.9 percent and the 24 owned properties returned 26.9 percent year-to-date.
Macerich Company owns 71 properties and the portfolio occupancy to an impressive 92.7 percent (Q2-12). The current price is $58.30 with a market capitalization of $7.76 billion. The dividend yield is 3.77 percent and the year-to-date total return is 18.54 percent.
As the holiday season grows closer I expect that Taubman and Macerich will continue to report strong occupancy and rent growth. Taubman, with a current price of $77.36, and Macerich, with a current price of $58.30, should both see also see continued growth as their development pipeline and expansion performance is stabilized.
These mall REITs could make for some excellent stocking stuffers this year. Taubman could top $80 by the time Santa drops down the chimney and I expect Macerich to move up to a year-end target price of $63.(credit Brad Thomas, Forbes)