By Brian Louis
By Brian Louis
CHICAGO - Mall owners, the best-performing U.S. property stocks for four years, have tumbled to the worst as sluggish retail sales and limited opportunities to expand drive investors to look elsewhere for earnings growth.
Real estate investment trusts that own regional malls reported the smallest increase in tenant sales per square foot in three years in the second quarter, according to data compiled by Bloomberg News. Nordstrom Inc. cut its revenue forecast for the year and Macy’s Inc. and Aeropostale Inc. disclosed declines in consumer purchases.
Slowing sales among retailers and rising borrowing costs are sparking concern that mall landlords, including the two largest, Simon Property Group Inc. and General Growth Properties Inc. (the owner of Providence Place mall), could be hurt too. Mall REITs have enjoyed strong tenant-sales growth since the credit crisis and recession, letting them increase rents. Now they face difficult comparisons to past results and limited avenues for external expansion.
“REITs have had a tough year across the board, and the mall REITs have had a tougher year in general,” said Benjamin Yang, an analyst at Evercore Partners in San Francisco. “Fundamentals are good but they’re slowing down.”
The Bloomberg mall REIT index has fallen 5.4 percent this year, the worst performing part of the industry, after posting the biggest increases from the start of 2009 through 2012. Even shares of outlet-center operator Tanger Factory Outlet Centers Inc., whose sole business is in one of the best-performing segments of the retail-property market, are down 5.5 percent this year.
Growth in mall-tenant sales, which rose 4.3 percent in the second quarter from a year earlier, peaked in the three months through June 2012 and has slowed each quarter since, according to Bloomberg Industries.
Simon Property and General Growth last quarter beat analysts’ estimates for funds from operations, a measure of cash flow used by the REIT industry. While results have been positive for mall REITs overall, they’ve been overshadowed by the potential impact of higher borrowing costs on property valuations, said Keith Bokota, an analyst at Principal Global Investors, part of insurance and financial services company Principal Financial Group Inc.
“When we look at the fundamentals that these companies are delivering, they’re strong,” said Bokota, whose Des Moines, Iowa-based firm owned shares of mall REITs including Simon and Taubman Centers Inc. at the end of July. “The rising interest rates have impacted the way REITs have traded recently.”
The 10-year Treasury yield has climbed to 2.9 percent from 1.63 percent on May 2, its low for the year, while the Bloomberg mall REIT index has fallen 18 percent since May 21, its high for 2013. The cost of raising money from the commercial mortgage-backed securities market also has increased.
Top-ranked bonds linked to commercial mortgages are yielding 129 basis points more than Treasuries from 88 basis points on Jan. 14, according to a Bank of America Merrill Lynch index. The spread peaked at 153 basis points, or 1.53 percentage points, on July 8.
Simon shares have fallen 18 percent since May 21, even as the company on July 29 reported an increase in second-quarter funds from operations and raised its FFO forecast for the year as it redevelops centers domestically and expands overseas.