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REITs Profit from Malls

Written By Brian Hicks

Posted January 22, 2013

Last year, mall landlords ended up as the second best-performing domestic REIT group with gains of 26 percent overall. But operators are focusing sharply on emerging markets, clearly shifting away from hard-hit retail centers and shopping centers.

Bloomberg reports:

“There are some tired malls out there that shouldn’t exist and won’t exist in a few years,” Ryan Severino, a senior economist at Reis Inc. (REIS), a New York-based real estate data company. “It’s very difficult to bounce back. Very difficult.”

With retail numbers improving (sales were up 5.2 percent over last year), affected properties in suburban areas are falling behind as the new store performance metrics bypass them.

Just last month, for example, Simon Property Group Inc. (NYSE: SPG), the largest domestic real-estate investment trust, shifted a $94 million loan on one of its malls in South Dakota over to a special servicer to negotiate with landlords on behalf of the bondholders.

Meanwhile, General Growth Properties Inc. (NYSE: GGP) entrusted three of its malls to loan-workout companies in Q3.

Nevertheless, after industrial and warehouse owners, mall companies were second-best on the list of highest-performing REIT industry groups.

General Growth, for example, was up 36 percent through 2012, with an 8.8 percent rise in operational funds in Q3 alone. Simon’s operations funds rose 19 percent over Q3, and the company saw shares rise 23 percent over the year.

Given consumer spending patterns lately, it makes sense that malls that already are highly visible and rated in their markets, offering high-end options, are the ones doing well.

On the other hand, malls with more modest ambitions likely won’t see their fortunes improve until consumer spending sentiment really picks up across the board.