Reply #50: Few Bargains in Retail REITs [View All]

[54anickel]

http://www.thestreet.com/_tscfoc/markets/realestate/10238910.html

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But what if rising credit card rates and high gas prices do end up dampening consumer spending at the mall, and not just at Wal-Mart? In the short term, it doesn't spell much danger for mall owners, although rent spreads could eventually be squeezed.

Mall tenants pay both a base rent and a "percentage rent," which is a portion of their sales. On a quarterly basis, typically only 3% of mall REITs' net operating income comes from percentage rents. Even if spending slows down, percentage rents might drop, but retailers are still on the hook for base rents.

The real danger is if consumer spending slows down for a lengthy period of time; that would force retailers to stop expanding their space needs or even close stores, says UBS analyst Ian Weissman. This could shrink overall tenant demand for space and give landlords less pricing power for new rents, and that would depress REIT earnings. Bankrupt tenants create a much bigger problem for landlords, because landlords are left footing the bill.

But right now, store closures and bankruptcy filings are running at historical lows. In the second quarter, both were down about 50% year over year, according to research by UBS.

"I don't think I've ever seen fundamentals this good," Weissman says, noting that rent growth is strong and that occupancies are pushing near historical highs.

Mall REIT fundamentals are expected to remain strong, but investors should be scratching their heads about whether there is any money left to be made in the high-priced sector. "At some level you have to start separating fundamentals from valuations," says Weissman, who is currently skeptical on the retail REIT sector because of high valuations.

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Just had a flashback to the 80's with all those unfinished or empty malls and developments littering the landscape.