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Wall Street Journal / Biz - Money

Mall Dividends Soar Above 15%, Tempting Big Investors

The selloff in retail property stocks over the past year has been so sharp that some mall operators now sport dividend yields greater than 15%, reflecting a widespread belief that the companies’ long-term prospects are bleak


By

Esther Fung

The selloff in retail property stocks over the past year has been so sharp that some mall operators now sport dividend yields greater than 15%, reflecting a widespread belief that the companies’ long-term prospects are bleak.

But at a time of rising wages, lower taxes and increasing consumer spending, mall owners’ bloated dividends are starting to intrigue investors.

While the portfolios of “class B” malls aren’t as profitable as top-tier malls, the properties are still productive and usually serve communities with considerable spending power, analysts said.

“People lose sight of the big picture,” said Samuel Sahn, executive director of Portfolio Management of Global Real Estate Securities at Timbercreek Asset Management. “It’s not going to zero.”

Landlords have been battered over the past two years. Shares of Chattanooga, Tenn.-based

CBL & Associates Properties and Columbus, Ohio-based Washington Prime Group declined 51% and 32%, respectively, in 2017, and have continued to slide this year. In turn, their respective dividend yields have increased to roughly 19% and 18%, respectively.

The plump yields suggest second-tier malls have little upside when online shopping is gaining prominence.

Store closures and retailer bankruptcies could cause mall owners’ revenue to slide, limiting their ability not only to continue paying dividends to shareholders but perhaps even to remain in business. CBL, for example, announced a cut in dividends in its third-quarter earnings last year, one big reason why its shares have slumped since.

Yet, these companies have several factors working in their favor. Consumers’ incomes are rising, while the tax overhaul should allow shoppers to keep more of their higher wages. At the same time, because REIT income is passed through to investors, they, too, will benefit from the tax break.

What is more, real-estate investment trusts are backed by physical real estate, limiting their potential losses.

All of that has some investors reconsidering this beaten down asset class.

“It is within the strike zone of attractiveness and it certainly intrigues me,” said Joel Beam, managing director and senior portfolio manager of real estate strategies at asset management firm Salient Partners LP, which currently doesn’t have any common-stock exposure to the two REITs.

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Mr. Beam said that while he thought that at some point investing in these REITs would be a risk worth taking, Salient isn’t investing in shares of these REITs just yet. “Investing in the equities at this point is for adults only,” he said.

Mall operators cite their ample dividends as a selling point. “Our dividend is an attractive component of our overall value proposition for prospective investors and an important way we return value to our shareholders,” said Stephen Lebovitz, chief executive officer of CBL. Mr. Lebovitz added that the company’s current payout is well covered by cash flow.

Washington Prime Group Chief Executive Louis Conforti said there are big differences between mall managers, and he hopes the market would recognize his company’s management expertise in the same category as industry giant Simon Property Group Inc., which focuses more on upscale properties than middle-tier malls.

Risk-averse, income-focused investors typically flock to REITs, which are generally seen as stable investments that provide a hedge against inflation. REITs have underperformed the S&P 500 index over the past year, in part because of the perception that rising interest rates are negative for REITs.

“It might be seen as attractive income, but you’re not buying something as secure as a Treasury bond,” said Keven Lindemann, senior director of global real estate at S&P Market Intelligence.

“When dividend yields get that far out of step with its peer group, there’s usually a reason,” Mr. Lindemann added, noting that class A mall REITs, such as Simon Property Group, Taubman Centers Inc., GGP Inc. and Macerich Co. have dividend yields below 5%.

Dividend yields of open-air shopping center REITs such as DDR Corp. , Kite Realty Group Trust, Kimco Realty Corp and Brixmor Property Group Inc. have risen between 8% and 11%.

CBL and Washington Prime still have access to capital from the debt markets. Washington Prime recently said it has secured an extension for its $1 billion credit and term-loan facility that can be increased to $1.5 billion.

Other investors are steering clear of the two REITs, noting that while there might be opportunity in these mispriced shares, questions about tenant health, availability of capital and cotenancy clauses are making it difficult to value their individual properties.

“The odds are these companies’ are being over-penalized given the uncertainty, but it’s impossible for the average investor to know that with any degree of confidence,” said Amanda Black, managing director and regional portfolio manager of Northwood Securities LLC.

Write to Esther Fung at esther.fung@wsj.com

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