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In 2014, real estate investment trusts (REIT) had a banner year. Using the Vanguard REIT ETF (VNQ) as a proxy, REITs gained an amazing 30.4% on a total-return basis. That beat the S&P 500 by 2.2x.
That’s great for anyone who was invested prior to the run-up… but it’s also a sign that investors should be wary going forward.
In particular, mall REITs are one investment that yield seekers should avoid at all costs. Despite some tempting dividends, the future is bleak for companies that own enclosed mall properties, as they’re quickly becoming ghost towns…
Consider this: The number of enclosed shopping malls with a vacancy rate at or above 40% – the point at which malls typically enter their death throes – has more than tripled since 2006. Nearly 15% of all enclosed malls are suffering from a vacancy rate between 10% and 40%, according to Green Street Advisors.
The reasons for the decline are numerous, ranging from online shopping to so-called “power centers†that feature big-box retailers like Target (TGT) and Best Buy (BBY). But no matter the cause, the trend should be a major warning sign, particularly when it comes to mall REITs.
Mall REIT Prices Are Sky-High
Today, most of the major mall REITs (as well as some other retail REITs) are trading at excessive valuations, as you can see in the chart below:
Every one of these companies is trading well above its 10-year median price-to-funds from operation (P/FFO) ratio, and many lack the growth to back up their price.
In fact, Simon Property Group (SPG) – the world’s single largest REIT – recorded exactly 0% one-year FFO-per-share growth (diluted) in 2014. That makes it even more dangerous than, say, Federal Realty Investment Trust (FRT), whose one-year FFO-per-share growth (diluted) was nearly 10%. There’s a chance FRT can justify its valuation… but Simon simply can’t.
