Mall REITs: Catch A Falling Knife

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• Despite the strongest year of retail sales growth since 2015 and a 30% decline in store closings, mall REITs continued to skid in 2018. Excluding Simon, the sector plunged 32%.
• The bifurcation between top-tier and lower-tier mall REITs continues to widen. Store closings remain elevated in low-productivity properties and the outlook for these weaker malls remains weak.
• A new and unexpected bifurcation has emerged: between REITs and their tenants. High-productivity malls reported a 7.8% rise in tenant sales per square feet in 4Q18, but just a 1.1% rise in same-store NOI growth.
• For high-productivity malls, however, the metrics are stronger than the stock performance suggests. Occupancy remains around 95% and leasing spreads averaged 10% in 2018 as the long-term outlook remains solid.
• Lower-productivity mall REITs appear to be a recession away from the end. That said, another half a decade of solid economic growth could be enough to turn it all around.