It's interesting how movies can be strangely prescient.
For example, take George Romero's campy 1978 horror thriller, "Dawn of the Dead." Filmed partially inside a north Pittsburgh shopping mall, it focused on murderous, undead zombies in search of human flesh to dine upon.
Yes, I know, a ridiculous premise, but the movie contains a classic, prophetic scene of zombies being the only creatures inhabiting the local indoor shopping mall. Surveying the mall full of zombies, one of the zombie hunters asks, "Why do they come here?" A zombie-hunting scientist answers: "Some kind of instinct. Memory of what they used to do. This was an important place in their lives." Back when the movie was filmed, indoor malls were the most popular place for shopping. The movie was reflecting just how fashionable mall shopping had become in the '70s -- but today, America is littered with dead and dying malls. Many indoor mall operators would be thrilled if even zombies showed up to shop.
Things have gotten so bad at indoor malls that Green Street Advisors, a research firm specializing in real estate investment trusts (REITs), has forecast that 10% of the nearly 1,000 large malls in the U.S. will fail over the next decade. Right now, there are more than 200 malls with more than 250,000 square feet that are more than 35% vacant.
As you can see from this chart, there is one mall owner that is bucking the downward spiral. In fact, two REITs are thriving despite the terrible environment for the traditional mall.
One of these REITs is Simon Property Group (NYSE: SPG).
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This REIT primarily invests in regional malls, premium outlets and community/lifestyle centers. While the traditional indoor mall design of huge anchor stores on opposite sides and a variety of smaller retailers lining the hallways around an indoor atrium is in a steep decline, this newer style of shopping experience continues to thrive. These so-called community/lifestyle centers are designed like a small town, with shops and restaurants lining a main street; shoppers can park outside their destination or simply window-shop at a leisurely pace. This naturalistic outdoor setting is much preferred than the endless forced walkathon at indoor malls.
|SIMON PROPERTY GROUP|
|Simon owns or has ownership in more than 325 retail properties in North America and Asia.|
Simon has not only capitalized on the growing community/lifestyle center trend but is also riding the success of premium outlet centers. Also known as outlet malls, premium outlet centers comprise brand-name retailers selling items at steep discounts.
Marshall Cohen, chief industry analyst for the market research firm NPD Group, says: "What outlets have been able to do is touch the core of the American consumer. There's no question that what we are witnessing is the transformation of how and where consumers are shopping. The recession really kicked it into high gear for outlet centers."
Simon owns or has ownership in more than 325 retail properties in North America and Asia. In addition, the REIT owns a 29% interest in Klepierre, a Paris-based real estate company that owns shopping centers in 13 European countries.
Simon recently posted strong third-quarter results and increased its dividend, lifting the forward annual dividend yield to 4.8%. The occupancy rate across its properties increased to 95.5% from 94.6% in the same period a year ago. Sales per square foot, a key measure of retail productivity, rose 3% from $562 to $579, and funds from operations were up 11.9% on a per-share diluted basis over the same time.
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What's more, Simon raised its guidance for this year, with funds from operations forecast to be $8.72 to $8.78 per diluted share and net income projected at $4.10 to $4.16, a $0.10 increase from earlier estimates.
In the technical picture, SPG fell off its uptrend this summer after hitting a high in the $180 range. The price has since formed a channel between $148 and $154.
The other retail REIT that's thriving despite the harsh environment for traditional malls is Tanger Factory Outlets (NYSE: SKT). Unlike Simon, Tanger is a pure outlet mall REIT. It owns 40 outlet centers in 26 states and Canada, and leases to more than 2,700 stores representing over 460 name brands.
Tanger recently restructured its unsecured lines of credit with a $250 million public offering of 3.8% senior notes due in 2023. Tanger also showed strong performance in the third quarter, with adjusted funds from operations up 16.7% from a year ago. In addition, the REIT boasts an occupancy rate of 98.7%, and same-center operating income climbed 4%, the 35th consecutive quarter of growth. SKT pays a forward annual dividend yield of 2.7% with a 76% payout ratio.
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Technically, SKT's chart is strikingly similar to SPG's. The price topped out in mid-April after a multi-month uptrend. It has recently fallen back, forming a channel between $30 and $35 on the weekly chart.
Risks to Consider: REITs are sensitive to interest rate changes. In addition, consumer-focused REITs run the risk of consumer tastes changing. Just like the indoor mall fad has died, the new types of shopping experiences may fall out of favor. In addition, e-commerce is constantly making inroads and changing consumer shopping habits. Always use stop-loss orders and diversify when investing.
Action to Take --> I like both Simon and Tanger. I find it particularly interesting that these seeming competitors work together on projects, such as an outlet mall in Charlotte, N.C., that broke ground in September. If I could invest in only one of these two stocks, I would go with Tanger. SKT has fallen into a value zone, and I think there is much more upside at its current price than Simon. Buying Tanger now with stops just below $29 and a 12-month price target of $44 makes solid investment sense.