DJ 2 Mall REITs Are Merging. Why Another One's Stock Is Jumping, Too. -- Barrons.com
By John Coumarianos
Mall giant Simon Property Group said it would buy an 80% interest in upscale mall landlord Taubman Centers for $3.6 billion in cash, or $52.50 per share.
The deal comes even as malls have suffered lately from the growth of e-commerce.
Simon (ticker: SPG) is paying a 51% premium over Taubman's (TCO) $34.67 closing price on Friday, Feb. 7. The price represents a capitalization rate of 6.2% and a price to funds from operations (FFO) multiple of 15. A capitalization rate refers to the first year's net operating income as a percentage of the purchase price. Funds from operations is a real-estate investment trust cash flow metric across all property types that adjusts net income for property sales, depreciation, and amortization, allowing for analysts and investors to compare companies and properties. The price/FFO multiple is a REIT substitute for a price-to-earnings ratio. Taubman produced $3.50 of FFO per share in 2019.
Taubman stock shot up 53% on Monday to $53.12, while Simon's shares edged up just 0.6%.
The deal also has implications for another retail real-estate investment trust whose share price has been in the doldrums, Macerich (MAC). The REIT also owns upscale malls, including Tysons Corner Center outside of Washington, D.C., Biltmore Fashion Park in Phoenix, and Santa Monica Place in Santa Monica. Its stock is up nearly 9% on the news to $25.40, as the Taubman deal suggests that Macerich could be targeted for a buyout as well. (Simon, in fact, made a bid to buy Macerich in 2015 for nearly $100 per share, or $17 billion, but Macerich rejected the offer.)
Applying that 15 price-to-FFO multiple that Simon is paying for Taubman to Macerich results in a $60 share price for Macerich, more than double its current price.
Smead Value (SMVLX), one of the few funds in Morningstar's large-value category to keep pace with the S&P 500 over the past decade, has nearly 3% of its $1.4 billion in Macerich stock. Portfolio manager Bill Smead said Macerich is a superior operator to Taubman and emphasized that property can provide inflation protection to an investment portfolio. Highlighting energy companies along with retail REITs, Smead said "Inflation-related companies are trading for a song."
Smead said Macerich's balance sheet might be slightly weaker than Taubman's, and both firms have been criticized for not cutting their dividends to conserve more cash. But Smead noted that Macerich had no trouble financing its operations.
Macerich paid a $3 dividend last year, a nearly 13% dividend yield on Friday's closing price.
While malls are struggling with an increasing amount of retail sales moving to the internet, Smead defended malls. "Human beings needs someplace to go, [and] need to be around each other," he said. The idea that people need to have a place besides work and home where they can gather has supported the hope that malls can be redeveloped into entertainment destinations that include restaurants, pop-up retail, and even amusement parklike attractions.
Write to John Coumarianos at john.coumarianos@barrons.com
(END) Dow Jones Newswires
February 10, 2020 13:35 ET (18:35 GMT)
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