Disclosure: I am short REITs in general through ETFs. I am not short SPG specifically but since SPG is one of the major REITs, its price performance is indicative of the overall REIT performance when the market is blindly buying a sector without consideration of fundementals.
My bearish argument against current REIT valuation is as follows:
Higher Vacancy Rates / Lower Occupancy
Lower Rent Rates / Lower Cash Flow
Low Historic Dividend Yields
CRE valuations fallen dramatically / Book Value of CRE higher than fair value on balance sheet
High Unemployment and Under Employment Rates / Less Disposable Current Income for Consumers
Consderably stock issuance / shareholder dilution
Banks unwilling to dispose of CRE due to capital concerns / Little cheap aquisitions for REITs
High cash balances on REITs balance sheet earn no interest income
Last year, when REITs fell so dramatically, the credit market had priced out the ability for REITs to raise capital. Since this sector relies on constant re-financing of debt maturities, there was great concern over the ability for many of these REITs to avoid bankruptcy. The stock prices of these REITs priced in this concern. Since then, the credit markets have eased considerably. REITs have tapped the debt and equity markets for needed cash. The FED has kept short term rates artificially low and driven many savers blindly into riskier asset classes to seek yield. REITs are one of these asset classes. In addition, I believe that hedge funds have piled into this trade. These funds do not intend to be in the positions long term, but until they see a compelling reason to sell, they will ride this trade as long as the can.
Shorting requires lots of patience. Sometimes logic is run over by short term enthusiasm and greed. My expectation is when the REITs start providing 1st Quarter results, the fundemantals and future expectations will reveal an industry that is a long way from full recovery even though their stock prices reflect it.
The attached link is an article of an interview with SPG's CEO:
It mainly talks about the Houston, TX market. Texas probably escaped serious damage of the financial crises so I don't think specific Q&A about their malls is all that relavent.
Here is a part of the article that speaks to the mall market in general:
Retailers are regaining their footing, he believes. “They've been very focused on their margins” and lowering their costs, “including getting their rent down, which doesn't thrill me.” And while chains have slowly begun to increase their store base, any significant new development for retail is still three to five years off, he said.
Online retailers will significantly hurt the brick-and-mortar stores that don't upgrade their shopping experience, he said.
Currently, the mall is a “dumb box,” he said, and he hopes to see more technological innovations at malls.
Doesn't sound to compelling to me. So there's my rationale, can any longs out there justify the current price of SPG and other REITs and give me a reason to change my opinion.
unfortunately this market is NOT about rational/fundamental analysis
it is about money market funds yielding 2/10 of 1 percent, and a Fed that is printing money at a rate far faster than they will admit (check out a treasury auction and tell me who the 'other' category of bidders is)
so, for now, the walking dead, like commercial real estate, will 'appear' to be doing well, just because REIT stocks are rocketing higher
many posters here will call you dumb, but you aren't; it's just that this market is being forced into stocks due to the low interest rate environment
you will be right in the end, if you can survive with enough of your money intact until it turns
People living on fixed incomes are having a very difficult time in this very low interest rate environment and turning to REIT's can be an attractive alternative. However, the flaw in your argument as it relates to SPG is that much of the stock is held by institutions. Typically, these large financial institutions are not chasing yield, they are much more concerned about capital appreciation - that is growth in the share price.
I strongly suspect that the fairly dramatic increase in share price is discounting several future events. First is an expectation that the economic climate is improving and retail sales (and retailer expansion plans) will improve with it over the next 12 months. This of course is good for the mall business. Second, that SPG will benefit from the resolution of the GGP deal. Either SPG succeeds with its bid or profits handsomely from its investment should another party take the prize. Third (and related to the first item above) an expectation that interest rates will remain modest, a plus for real estate companies. There's lot's more (like chances of a dividend increase improve with a stronger market, the SPG outlet division is booming) - absent another market meltdown, SPG seems to be strong and gaining momentum. I wouldn't short against this trend - if you do proceed with great caution (with funds you can afford to lose).
Paulson just helped finance the bid for GGP. I agree with you that REITs are good shorts down the road but until the signs are showing up, stay with the general trend and bet with the big whales like Paulson.
stocks and REITS are not priced based on valuation...they are priced based on supply and demand.....right now demand outstripps supply so they go up......your analsys of why you are short is irrelevant in a bull market....