Chilton Asset Management, a Houston-based registered investment advisor, recently trimmed its holdings in Simon Property Group, which raised some eyebrows in the market. But the advisor says the move was driven more by a desire to rebalance its portfolio and is not indicative of any wariness about Simon specifically or mall REITs more broadly.
Simon went from comprising 8 percent of Chilton’s REIT holdings to about 6.5 percent.
Of the mall REITs in Chilton Asset Management’s portfolio, which also include The Macerich Co. and General Growth Properties, Simon seemed to have fewer imminent events that would to propel its market price to Chilton’s target, said Matthew Werner, a managing director at Chilton Asset Management and its REIT portfolio manager.
Macerich was the subject of takeover talks and GGP agreed to a $9 billion cash buyout from Toronto-based Brookfield Asset Management in March.
“We still really like the stock, the portfolio, the management team and all the reasons we got involved to begin with,” Werner said. “It was more of a portfolio management decision than a change in thesis on Simon.”
Yet after GGP’s agreement with Brookfield, the market felt that mall REIT values—and possibly those of the assets in the corporate portfolios—had been unjustly dampened. Werner agreed.
“They are not getting credit for their portfolios,” he said. “They are recycling the capital into their own properties where can make better money than buying back down stock. For the most part they are doing that.”
Indeed, public REITs tend to own higher-quality mall portfolios than private companies, according to data from NAREIT, Green Street Advisors and Brookfield. Public REITs own about 226 malls with A++ through A- ratings, while private companies have just 70.
What is missing, in Werner’s view, is patience from investors as mall REIT management teams oversee redevelopments that will pay off in a matter of three or four years, especially when it comes to repositioning a 250,000-sq.-ft. box at a mall.
The Construction and Interest Rates Barometers
That lack of forbearance with REIT mall management is worsened by investor fascination with tech stocks, and how investors interpret REIT performance during periods of rising interest rates, say industry professionals.
“Mall REITs have a story that does not serve them: e-commerce,” said Brad Case, NAREIT’s senior vice president of research and industry information. “None of the lowest quality malls are owned by REITs and those are the malls where the retailers are going to close stores, if any. They have strong protection from the pain of e-commerce, but the market has not been paying attention to that.”
What has been getting investors’ attention for the last 18 months is tech stocks, namely companies like Apple, Google and Tesla, Case said. (This aligns almost cleanly with the last time that REIT stock prices were at a high mark, around July 2016.)
“What we have right now looks uncomfortably like the tech stock bubble of the late 1990s,” Case said. “Investors didn’t want to be in other companies when could be in those tech stocks.”
As for rising interest rates, they eventually improve property values as inflationary periods usually accompany periods of higher consumer discretionary spending and revenues, which will likely benefit class-A malls, Werner said.
“This past quarter, on a trailing 12-month basis, Simon and Taubman and GGP were in the in 2 percent to 6 percent sales growth range,” Werner said. “That is strong re-acceleration of sales growth. Tax reform will continue to make those numbers accelerate, and that will help them do well in a rising rate environment.”
Case also noted that construction activity—a key determinant of the real estate market cycle—is still low in relation to the rest of the economy.
Indeed, in its construction update for year-end 2017, JLL noted that the national construction backlog was just 9.5 months, up 0.8 months on a year-over-year basis, a sustainable increase. JLL said it expected construction industry to mature throughout 2018, along with the rest of the U.S. economy and the commercial real estate cycle.