"A" Mall Valuations - Is there a next GGP?
Any thoughts on some of the mall REIT valuations and how you'd decide when to take the plunge?
I look at Macerich for example, $5 today, $25 before it all went to shit. Not to mention, $50 a year earlier (Q1 2019). Now trading at 10% of where it was 15 months ago.
Obviously these companies have tons of debt, and only a modest haircut to asset value would be a massive haircut to NAV. So not calling it crazy.
But history has shown that A-malls are pretty resilient. Favorite case is GGP in 2009 where people made 100x their money if they bought at the bottom. It would seem that a quick 3x is in the cards if it becomes clear bankruptcy or a big equity raise won't be needed. Longer term, 7x-10x plausible as we get back to normal.
New SBA bill will give these tenants forgiveness on the rent portion of their loans. Could be sooner rather than later that mall cash flow restored.
Not a real estate expert, would be curious when y'all think is a good time to take the plunge.
Been mulling this exact same thing over the last couple of weeks - was worried I'd missed the bottom, but we're basically back after today so will be interesting to see where things go from here.
GGP is probably a good case study for today. Not that the times are analogous, but what ultimately sunk them was having a crummy balance sheet at the wrong time. GGP used primarily secured debt, most of which was CMBS, with shorter maturities and higher leverage than most of their peers. When the financial crisis hit - again, different from today in that some of their tenants were still open - it didn't matter that they had a great portfolio full of A malls with good tenants, because their debt was maturing and they had no way to refinance.
So that's a long way of saying that I am very keen on balance sheets when I look at landlords today. I'm not interested in the B or lower owners, since I think they could be in for a more permanent repricing even if they survive (A malls may not be 5-cap assets anymore, there's no way B or lower are) The worst of this is going to be very temporary, and will hopefully be blunted by some of this stimulus, but I don't think anyone would be surprised to see a wave of tenant bankruptcies that accelerates redevelopment plans. Having less debt, and specifically less secured debt is going to make surviving/thriving through this significantly more likely.
Simon is definitely my favorite right now - we'll see what happens with TCO, but even if they have to swallow it, those are accretive to portfolio quality. They have a good balance sheet with a ton of near-term liquidity. I see this one as more of a long-term hold where the market is offering a very attractive entry point. The upside isn't like a macerich, but I have a harder time seeing it going to zero. Macerich is a little more complicated, they have a lot of secured debt and partnerships which makes things a little harder to decipher. But management is buying equity and they own some good malls, and are trading at 12% of consensus NAV. So if they make it out alive, it could have some significant upside...
Regarding insider buys, a cynical thought I've had, not exclusively macerich but in general, Managers buying at such a low: quick way to offset a higher cost basis of their equity, essentially they're buying a hedge that offsets their existing holding losses if the stock rebounds? Does this make sense when expressed mathematically?
Obviously they might believe it will otherwise they wouldn't buy, but for guys with founder roots or significant ownership already, and significant net worth/liquidity, it makes more sense as a personal portfolio hedge. And it's one factor in a positive signal on the stock, and I'm sure competitive management teams with something to prove will place their money on the table, but if I were the financial advisor I'd say, hey you should buy your own stock to potentially offset the loss, plus it looks good because it aligns with your incentives. Sorry for how cynical this is.
EDIT: insider "trading" to insider "buys
The biggest question with the big boy mall REITs is whether or not you believe in their ability to execute on their redevelopment strategies.
This whole pandemic situation will accelerate bankruptcies for the bottom ~20% of mall tenants. These are tenants that were on the bankruptcy track anyways, this event just accelerated that timeline. There won't be tenants to backfill these spaces; malls are way oversized these days.
This means that, at a 1M sf superregional mall, landlords will be getting back about 100K-200K sf of space. Who is going to be able to box it up and redeploy it in a compelling way?
Simon has proven that they can do this, while the jury is still out on Macerich. Looks like Macerich recently hired a new head of development, maybe that solves some of their problems.
As for mall valuations, private market valuations for the best product are still roughly equivalent to 2015 values (have seen malls trade at mid 4 caps in the past 18 months). The value erosion starts when you're looking at the A-/B+ product - those have definitely taken a haircut.
Simon tried to buy Macerich in 2015 for $91/share. All they do is destroy shareholder value.
While partially true, not entirely fair given that valuations have dropped across the industry...
Hmm, just out of curiosity is there an avenue to argue that Simon overpaid for TCO, or is that the price to pay for A grade?
Well, the mall REITs are down between 60 and 90% since the deal was announced, so by that metric I guess you could argue they overpaid? If Simon needs to sell equity at anywhere near their current share price to pay for the deal, it's not going to be accretive, so that's another argument...
But, Taubman has a pretty high-quality portfolio, and the purchase price represents a low-6% cap rate. So by that metric, and the fact that high-quality malls are mid-4 cap type of assets, it doesn't seem like they overpaid at all. They also have the liquidity that they shouldn't need to raise equity in the short-term to pay for the deal and can hopefully wait for things to improve from a share-price perspective.
Agree with all of this, the only thing I would add is that there's a major disconnect between public and private markets when it comes to malls. Quality malls almost never trade, and when they do, they don't trade at the values implied by the public markets.
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