A Conundrum: Retail Sales Are Strong, But The Market Says Class A Malls Are Struggling

NEW YORK–Class A malls are in trouble. This is, at least, according to various analysts that expressed dismay last week about Brookfield Property Partners’ $9.25 billion deal to acquire the rest of GGP. And of course, the market signaled its disapproval of the deal, promptly punishing retail REIT stocks in the wake of the news of the $23.50 per share purchase price. The theory behind the upset is that it had been broadly expected that GGP would trade at a higher price. The fact that it didn’t — assuming shareholders approve the deal — thus points to a decline in valuations across all mall stocks, including the REITs that hold high-quality assets.

JPMorgan analysts said in a note that:

While we still see value in mall stocks, we think the GGP news is negative for the sector and, as such, we are moving our three previously overweight-rated mall REITs to neutral.

RBC Capital Markets analysts wrote that:

The terms of the agreement are below our target price [of $24 a share] and the average sell-side target, which suggests to us a reset lower for pricing of high-quality mall portfolios

And at BTIG:

GGP management has clearly stated on numerous occasions to shareholders that its assets are worth substantially more than where its shares are currently trading. We are surprised that the Special Committee has unanimously approved the new offer and recommends that the GGP shareholders approve the proposed terms.

These reports belie a year over year increase in inline store sales for such REITs as Macerich, Simon Property Group, Taubman and GGP, according to Trepp Talk.

Jen Loukedis breaks down the numbers in a post:  Macerich reported that inline store sales across all of its properties climbed 4.8% to $660 per square foot last year. Simon reported average sales of $628 per square foot for 2017, a 2.3% increase from the previous year. Taubman’s inline sales rose 2.3% to $810 per square foot while GGP’s sales per square foot rose 10 basis points. “Even though occupancy declined for most of the country’s top mall operators, all four of the aforementioned REITs managed to maintain levels north of 95%,” Loukedis wrote.

The reason why sales rose is simple: these REITs all have high-end tenant rosters.

The reason why the market punished the sector for GGP’s disappointing acquisition price is less clear. Indisputably, REITs have been beaten down by the market over the last year in general; so has retail. For some time the market had been making a distinction between high-end retail REITs and those that held class B and C properties. Now it appears the line is blurring.