Are Regional Mall REITs Really Safer Bets Than Shopping Center REITs?

A Wall Street Journal story today contrasts the performances of shopping center REITs and regional mall REITs. The story looks at the stark differences in Dow Jones' indexes of shopping center REITs and mall REITs where it notes that regional malls sported gains of 60.6 percent in 2009 while shopping centers logged a weak total return of negative 1.6 percent.

The Wall Street Journal concludes that "The disparity between strip centers and regional malls reflects two key differences: the tenant mix and locations. Investors are concerned that the business model being followed by many strip-center operators is flawed and could haunt them longer term."

Yet is that really the answer? NAREIT's property specific indexes, which I've charted below for the three retail segments it tracks, show a similar result. But I've also included the total returns for those indexes going back to 1994. One thing that jumps out immediately is that the big gain regional mall REITs experienced this year came after the same segment suffered a brutal 2008 and a smaller fall in 2007. NAREIT's figures indicate that regional mall REIT total returns were down 60.6 percent in 2008 in contrast to just a 38.8 percent drop for shopping center REITs. And if you fall 60 percent one year and rise 60 percent the next, it doesn't mean you're back where you were. It means you're still 36 percent below where you were at the peak. In other words, regional mall REITs, because they fell further, didn't need to post huge absolute gains in order to post impressive gains in percentage terms. Isn't that part of the answer here? Moreover, the growth in 2009 doesn't fully repair the damage done in the drops of 2007 and 2008.

retail reits

(Click for larger image.)

The Journal's thesis also directly contradicts what is more commonly argued--that neighborhood shopping centers, because their tenant base consists of necessity retailers like supermarkets, dry cleaners, hair salons, etc., are more recession resistant than regional malls that have tenants that rely more on discretionary spending.

Lastly, the bankruptcy of General Growth Properties--the second largest regional mall player--has to be factored into the mix here as well, does it not? In 2008 the REIT's stock tanked as fears about its bankruptcy surged. Many thought it would not be the only regional mall REIT to go down. The bankruptcy filing did take place in 2009. But so far General Growth has weathered the restructuring process rather well. And no other REITs have followed it into bankruptcy. In fact, GGP's stock trading in OTC market is now at about $12.00 per share--up from a low of $0.32 per share. The fact that the worst fears did not materialize for General Growth and for other regional mall REITs had to play a role here. Investors that were freaked out about regional mall REITs have come back. I think that too partially explains the good year regional mall REITs had.

The story also says, "Last year, investors punished the retail REIT sector." But NAREIT's numbers show that retail REITs as a whole posted a positive total return of 27.2 percent in 2009. That doesn't sound very punishing. It was 2008 when retail REITs got punished. That year, total returns were down 48.8 percent from the year prior.

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