Following three bankruptcies and one company going private, the list of interesting mall real estate investment trusts (REITs) has shrunk materially. At this point, there are really only three worth considering: Tanger Factory Outlet Centers (NYSE: SKT), Macerich (NYSE: MAC), and Simon Property Group (NYSE: SPG). Each of these names is likely to survive, but one really stands out for those that want to balance risk and reward. Here's a quick look at each name.
Tanger Factory Outlet Centers owns exactly what its name implies. That's both a reason to like the REIT and a potential reason to avoid it, depending on how you look at things. The company's 36 properties are particularly desirable locations today because they are predominantly outdoor structures. That means there's plenty of air flow, and therefore, the risk for consumers simply walking around the property is relatively low.
In the first quarter of 2021, customer traffic was basically back to pre-COVID 19 levels. Some of the longer-term benefits of these outdoor structures include relatively modest maintenance costs and the ease of bringing in new tenants because of the uniformity of the spaces.
After suspending its dividend in 2020 for two quarters, Tanger's quarterly disbursement is back at roughly half its previous level. It will take time for the REIT to get occupancy back up, but that's not particularly shocking, given that finding new tenants takes time, even in the best markets.
So what's not to like? Tanger is a one-trick pony, which means investors are putting their eggs in just one basket here. And even though it has a solid balance sheet, with an investment-grade credit rating, more conservative investors will probably find its laser focus troubling. It's most appropriate for investors specifically looking to focus on the outlet niche.
2. Diversified, but leveraged
Macerich's portfolio of 46 properties is mostly enclosed malls, but it also includes a trio of outlet centers. Thus, it provides a little extra diversification beyond what Tanger offers. And the malls it owns are pretty good properties, with industry-leading net operating income (NOI) growth -- before the pandemic hit. Like Tanger, it's going to take some time for Macerich to get its portfolio back on track. However, it looks increasingly like it has the staying power to muddle through. That wasn't so obvious in 2020 because of the company's heavy leverage.
That helps explain why the REIT's dividend was cut 80% over the course of 2020. In fact, investors probably shouldn't go in expecting a big dividend increase until the company's debt load comes down a bit. Some numbers will help here. Macerich's financial debt-to-equity ratio is around 2.5 times, compared to 1 times for Tanger and around 0.75 for Simon Property Group.
That leverage means there's some financial risk here, given that leverage reduces financial flexibility. Even though Macerich looks like it, too, will muddle through, it has big costs ahead as it looks to keep its malls relevant and modern. So debt will likely remain an issue for a while. All in, the stock is probably most appropriate for investors who can handle turnaround situations.
3. A balanced approach
The last name up is Simon Property Group and its collection of around 200 enclosed malls and outlet centers. It is easily the most diversified name here and, at least prior to the coronavirus pandemic, offered the second-best NOI growth in the peer group. On top of that, as just noted, it has the strongest balance sheet of the group. Like the other two REITs above, it's going to take some time for Simon to get its properties retenanted, but it appears to be in a stronger position to ride out this downturn than its peers.
However, the really interesting thing about Simon is that it hasn't simply muddled through the industry's headwinds. It has used them to its advantage by acquiring a mall peer and, with partners, investing in bankrupt retailers with still-iconic name value. When it reported first-quarter earnings, it actually upped its full-year 2021 guidance and, shortly thereafter, increased its dividend by roughly 8% (the dividend was cut roughly 40% in 2020).
But here's an interesting nuance: The bottom end of management's guidance range was trimmed by $0.20 per share, while the top end was hiked by $0.05. Reading into that a little, it suggests that while the outlook is a bit more positive, the worst may be behind the company. So not only does Simon give investors the broadest exposure, but it has industry-leading financial strength and appears to be showing the most progress in its turnaround effort. It's likely the best all-around pick for investors in the mall space, with an attractive risk/reward balance.
The final call
More aggressive investors shouldn't shy away from Tanger or Macerich at this point, but both are really acquired tastes: Tanger, because of its outlet center focus, and Macerich, because of its heavier use of leverage. That leaves Simon as the best choice for most investors, given its attractive positioning relative to peers. It also offers a fairly generous 4.5% dividend yield, which is more attractive than the 4% at Tanger or the 3.6% at Macerich. So, even dividend investors looking to maximize the income their portfolios generate will probably find it the most desirable.