Ongoing inverse Money Multiplier in Mall REITS

This entry will detail my position that the Mall REIT category is in significant jeopardy of potential massive losses of shareholder value in the foreseeable future, and why I am long on puts and shorting a few names within the category.

Please forgive any slightly incorrect term usage or otherwise semantic errors as it has been a long time since my undergrad studies.

My motivation for this entry is twofold…

#1 I have already placed my bets and I want them to be publicly on record. I am short CBL, GGP, PEI and WPG. I am also long the puts on CBL Sept 2017 $7.50 strike, the GGP Jan 2018 $14.74 strike, the PEI July 2017 $13 strike, and the WPG July $7.50 strike.

#2 Regularly I see people making posts about how they are buying these names because they are so undervalued and they are a great bargain with a great yield, a position I strongly disagree with and if I can save one person some money on this failed logic I’ll be very happy I made this post.

Any Econ 101 student should be familiar with the concept of the money multiplier. IE More demand for XY or Z =more jobs = more money for consumers= more consumption = more need for jobs, and so on and so forth. I believe that in the Mall REIT sector you are going to experience the exact opposite of this phenomena in the coming years, and potentially decades.

At this point it is clear that in general retail is having a hard time, there is a massive shift to online shopping in full effect, a shift to discount retailers, and a situation where many people even when they do go to the mall will spend less due to their targeted shopping which is a result of the research that they did on, ….you guessed it, the internet.

You combine the 600 lb gorilla in the room of the tariffs POTUS Trump has been threatening, the general protectionism that has been a theme from day 1 with Trump, and the certainty of a rising interest rate environment, and you already have retailers closing their door with an unprecedented urgency.

Retailers have the luxury of opening and closing stores based on profitability,  traffic, expectations, etc. That is a luxury that Mall REITS do not have, once they build the mall they can’t, (or at least not nearly as easily as an individual store), close it. They are for lack of a better term, the “bag holder”.

I have heard on numerous occasions, the primary reason to buy and hold the Mall REITS is the great yield that they have, as though it as good as an FDIC bank savings account interest rate, or buying a U.S. Treasury bond. People buying these Mall REITS are proposed a yield in excess of 10% in many cases, and they think these are as good as gold.

***I am not implying that any REIT has made that implication, only that many investors perceive the yield as “set”, or “fixed”, even though the prospectus for all REITS would obviously contradict that concept.

The yields on REITS are not fixed, not at all. They are a disposition of 90%+ of their earnings, which affords them the tax benefits of being a “REIT”. By the very definition of this concept the dividends are not guaranteed, and in the thesis I am proposing they are more likely going to be reducing dividends than keeping them the same over the coming years.

What is happening is the retailers, (with a few exceptions), are under dramatic pressures, slimmer margins, less customers, less average per sale, and less profitability, all while facing the potential for an increase in costs, ie tariffs, or trade wars. This is forcing retailers to become more efficient, which will directly result in them closing stores. For example…

JC Penny closing 138 stores

Macy’s closing 69 stores

Sears and Kmart closing 150 stores

HH Gregg closing 88 stores

Abercrombie and Fitch closing 60 stores

Crocs closing 160 stores

The Limited closing 250 stores

Payless Shoes closing 400+ stores

and on and on.

My forecast for what will happen is as follows.

This is just the tip of the iceberg with the challenges all Mall REITS are facing now. The inefficiencies of a consumer buying a t-shirt at a fancy high cost real estate location are being eliminated. Basic Economic Law teaches us that free markets always will internalize external inefficiencies and that is exactly what is happening. Unfortunately for Mall REITS, you are in for a tough, tough time, that is just starting to happen.

Now that the Big Box, “cornerstone”, stores are starting to close, it will set off a chain reaction of lower mall traffic, lower sales, lower profit, lower rent, etc that will ultimately lead to lower revenue revisions, lower earnings revisions, consolidations within the Mall REIT industry, dividend cuts, lower share prices for Mall REITS across the board, and ultimately a few bankruptcies in the industry.

This is my personal opinion on this subject, I have stated my goals and interests in the beginning of this entry. I don’t think that the Mall is going away, I love Malls personally, I just think they are severely over saturated and facing some of the most massive headwinds an industry has ever faced. Good luck out there.



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