The Death Of The Mall?
UBS | Mar 27, 2017 15:20
Originally published by UBS Asset Management
The tide is moving against US Malls (Shopping Centres), with their large mall landlords (BBREMALL Index) underperforming dramatically against the MSCI US REIT Price Index (MSCI US REIT). In the past year the malls have fallen ~19% while the US REIT Index is up ~2%. The mall operators, dominated by Simon Property Group Inc (NYSE:SPG), GGP Inc (NYSE:GGP) and Macerich Company (NYSE:MAC) all have strong balance sheets aided by non-core assets sales. However, sentiment has shifted given all the talk about Amazon.com Inc (NASDAQ:AMZN) plus the numerous store closures as retailers adjust operations for today's omnichannel environment. JC Penney Company Inc Holding (NYSE:JCP) recently announced the closure of two distribution centers and 130–140 stores in 2017 and joins the ranks of Macys and Sears, which also plan to close stores this year.
That sentiment has spilled over to the Australian market, with Scentre (AX:SCG) and Vicinity Centres Re Ltd (AX:VCX) both underperforming against the benchmark FTSE CNBC Global 300 Real Estate REITs.
As mentioned last week, Australian shopping centres are different given our stronger population growth, our tighter planning systems, and the fact that there's 3x as much retail space per person in the US versus Australia. We're now at a point where some of our shopping centre names are screening attractive on valuation measures, particularly Vicinity. It’s been a while since we’ve seen a large cap REIT trade in line with NTA (sell assets, repay debt, distribute the remainder to unitholders) but VCX's price of $2.75 compares to it's $2.73 NTA. Some analysts are questioning their capital expenditure plans, some question their payout ratio, some question the smaller assets they own. However the stock seems over-sold given it's trading near NTA, has gearing of ~24%, and a distribution yield of 6.5%. We tend to run against the pack on many of our stock calls and in this case we're overweight Vicinity. Our view is that the mall is not dead but adjusting once adapting to market conditions. Retail always evolves and to their credit, so do the large global landlords.
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I also wanted to point out the UBS Property Securities Fund strong performance during reporting season, driven by being overweight seven of the top eight stocks and being underweight the bottom eight. The Fund has delivered +12.2% pre fees vs the benchmark of +8.2% in the year ending 28 February, 2017.
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