Mall REITs' Debt Load
Worries Investors
Mall owners are continuing their string of strong profits that in most cases are beating estimates and showing that underlying retail fundamentals remain strong, but investors are starting to get worried. One reason: these are among the most-leveraged real-estate companies.
The mall owners are heavily leveraged, especially General Growth Properties Inc., and a Fitch Ratings report earlier this week may explain why its stock has fallen recently. The report said mall companies are more vulnerable to rising interest rates than other real-estate firms.
Still, the mall sector's fundamentals "are not just healthy, but I would say robust," said Matthew Ostrower, a Morgan Stanley & Co. real-estate analyst. Rent spreads, the difference between what new leases pay compared to expiring leases, continues to show strong growth. Same-store sales are also healthy, as are the retailers malls depend on to occupy their space.
General Growth, the second-largest mall company in terms of malls owned and market capitalization, reported earnings that beat estimates by a penny a share Monday, though that included a one-time gain of four cents a share due to an accounting change.
The Chicago company's funds from operations, the measure most commonly used to gauge a real-estate investment trust's performance, increased 20% to 72 cents a share from 60 cents a year ago.
Same-store net operating income was up almost 11% in stores General Growth has owned for more than a year, "a huge number," Mr. Ostrower said. But occupancy fell slightly over the past year and its tenants' same-store sales were up 2.7%, below what other companies have been reporting.
General Growth shares dropped 86 cents, or 2.2%, to $37.53 each in 4 p.m. New York Stock Exchange composite trading yesterday.
The concern is that mall owners' heavy debt loads, stemming from years of acquisitions, will hurt them. The average debt to total capital for mall REITs is 71.8%, compared with an average 46.6% for non-mall REITs. Mall owners also have more variable-interest loans. Floating-rate leverage is 23.6% for mall REITs compared to 8.1% for other REITs. General Growth's debt is well above the average for mall REITs at 81.7%, according to Fitch, primarily due to its $7.2 billion acquisition of Rouse Co. late last year.
Fitch said it expects the effects of rising interest rates to vary widely among different companies, but will be more negative for those companies with large amounts of variable-interest debt. Companies who have taken advantage of low rates to refinance into fixed-rate loans are better off.
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