The United States is dependent on the consumer for a complete economic recovery. A recovery that brings back increasing revenues and a boost for retail. When the consumer is back in full (and sustainable) force, spending discretionary income, and not going into debt — we may finally be fully back to normal. That’s where some mall and outlet REITs may come in handy for your portfolio.
A recently upgraded REIT…
“We are pleased that the strength and flexibility of our balance sheet as well as the value of our market-dominant strategy was recognized by Moody’s with the assignment of an investment grade rating; an important milestone for CBL… We believe a balanced financing structure, including full access to both the secured and unsecured credit markets, will allow CBL to fuel our ongoing growth using the most attractive sources of capital and further reducing our cost of funds. We look forward to building on this significant accomplishment.”
CBL & Associates Properties, Inc. (NYSE:CBL) also recently witnessed an upgrade to buy from Goldman Sachs Group, Inc. (NYSE:GS) as well.
An East-Coaster to consider…
Another mall REIT to consider is Pennsylvania R.E.I.T. (NYSE:PEI). The company owns, manages, develops, acquires, and leases mall and power and strip centers, and is primarily concentrated in the Eastern United States. It also provides management, leasing, and development services to affiliate and third party property owners.
The company has also witnessed an upgrade and a string of recently raised price targets by a number of firms as well.
A midwest based REIT…
Based in Colombus, Ohio, Glimcher Realty Trust (NYSE:GRT) managed and leased 27 properties, including 23 malls and four community centers located in the states of Ohio, West Virginia, California, Florida, North Carolina, Pennsylvania, Kansas, Kentucky, Minnesota, New Jersey, Oklahoma, Oregon, Tennessee, and Washington as of 2007, according to their company profile.
Already one of the nation’s premier retail REITS, Glimcher is also looking to expand and diversify. The company recently announced that it plans to add a 275-unit, luxury apartment community to Scottsdale Quarter in Scottsdale, Arizona, in a partnership with Crescent Communities. Glimcher’s CEO also added that:
“A luxury, multifamily community has always been a part of our vision for The Quarter. Based on the high level of demand from retailers and businesses interested in coming to Scottsdale Quarter, adding luxury apartments will build upon the center’s current success.”
Valuations and fundamentals from a traditional perspective…
Moving right along, here is a brief glance at CBL & Associates Properties, Inc. (NYSE:CBL):
| P/E | EPS (ttm) | Forward P/E | Annual EPS Est (Dec-13) | Dividend (yield) | |
|---|---|---|---|---|---|
| CBL | 46.38 | 0.56 | 11.24 | 2.23 | 0.92 (3.50%) |
Data obtained from Yahoo Finance as of May 23.
As can be seen, the company looks much more attractive going forward than it does now, so future earnings are key. If they can meet expectations or at least come reasonably close, they look pretty cheap going forward. Meeting their annual estimates going forward may also mean great things for the growth of the trust’s dividend. The firm’s payout ratio is currently listed at over 164%, but if this same dividend payment is paired with future earnings, then the payout sits at only around 41% — which could mean increasing dividends.
| P/E | EPS (ttm) | Forward P/E | Annual EPS Est (Dec-13) | Dividend (yield) | |
|---|---|---|---|---|---|
| PEI | N/A | -0.33 | 10.39 | 1.96 | 0.72 (3.40%) |
Data obtained from Yahoo Finance May 23.
Pennsylvania R.E.I.T. (NYSE:PEI) currently has negative earnings, so like CBL & Associates Properties, Inc. (NYSE:CBL), it looks better when considering future earnings. Even more so, actually. If the company meets annual EPS estimates going forward, the current dividend payment would be only at around a 37% payout.
| P/E | EPS (ttm) | Forward P/E | Annual EPS Est (Dec-13) | Dividend (yield) | |
|---|---|---|---|---|---|
| GRT | N/A | -0.23 | 15.82 | 0.66 | 0.40 (3.00%) |
Data obtained from Yahoo Finance May 23.
Glimcher is in a similar predicament as Pennsylvania with its negative earnings, but its payout ratio (when considering today’s dividend with forward EPS estimates) is around 60%. If the company can meet annual EPS estimates, nice dividends may reward investors in the future.
But are REITs valued the same way as traditional stocks?
Many would argue that REITs are better valued by looking at the funds from operations (FFO) or even the adjusted funds from operations (AFFO) in comparison to price to calculate a REITs true worth. This is because it is a better and more precise measure of residual cash flow, which many would argue would be the best way to judge the firm’s true ability to pay and increase its dividends.
For instance, CBL’s full year FFO guidance is in the $2.18-$2.26 per share range. This means that the company is trading at a forward price/FFO ratio of 11-12, which looks much more reasonable than when considering just the firm’s earnings — and this ratio also gives a much clearer picture of the REITs actual valuation.
Pennsylvania R.E.I.T. (NYSE:PEI) is guiding towards a range of $2.00-$2.08 per share in Adjusted FFO for 2013, which gives it a Price/AFFO ratio of around 10 going forward.
With a guidance of $0.63-$0.67 FFO per share, Glimcher looks to be the most expensive of these three REITs — trading at 19-20 times 2013 projected FFO.
The bottom line
The key to these mall and retail REITs are their prospects. If these firms can live up to what analysts are expecting them to earn going forward, they look relatively cheap and will have a good amount of room to possibly up their dividend payouts. If not, it could get ugly.
One possibly good sign for these REITs comes from UBS AG (USA) (NYSE:UBS), which is apparently bullish and currently overweight mall REITs. These mall REITs may be somewhat risky, but they could also end up paying off big if earnings get to where they need to be and/or consumer spending picks up.
While FFO is a better valuation metric for REITs, net income is still important, and investors should still keep a watchful eye on earnings as well.
If you want to own a mall REIT and reap in the dividends, then be careful and do your own due diligence, but if you do decide to pull the trigger — remember that REITs are complex, and many more things other than just earnings and the more traditional valuation metrics used to value ordinary stocks need to be taken into consideration.
The article Want to Own a Shopping Mall? 3 Retail REITs to Consider originally appeared on Fool.com and is written by Joseph Harry.
Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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