The Decline of Shopping Malls

Financials metrics are worth more than a thousand words

Published on:
April 6, 2018
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Look at the price history of a few companies operating in the shopping mall sector and you will see the ominous outlook for the industry. In 2017 Simon Property Group (SPG) traded as high as $188 and as low as $150. It now trades at $154. Realty Income (O) traded between $64 and $53 during the same period; it now trades at $52 GGP Incorporated (GGP) traded between $26 and $19, and now trades at $20. And Seritage Growth Properties (SRG), a real estate company which I bought last week, traded in 2017 between $50 and $38. It now trades at $35.

Because a loss in popularity is a signal for opportunity, I decided to compare the operating performance of four real estate companies, hoping to find undiscovered insights. And this essay is about what I learned.

Profitability, dividend policy and growth trends


With a ratio of funds from operations (FFO) to sales of 72%, Simon Property showed the highest ability to translate revenue to after-tax cash flow. GGP and Realty Income also demonstrated reasonable ratios of 65% and 63%, respectively. Seritage, on the other hand, had the lowest FFO to sales ratio at 51%. The optimist investor may regard the latter as the highest potential for a future increase in the ratio though. 

It was also apparent that Simon Property earned the highest amount of FFO per dollar of equity. In 2017 Simon Property earned or $16.89 FFO per share, using a $17.8 book value and a ratio of 40%. Compare that to Seritage, which generated FFO of $2.48 that year, using a $34 book value, a ratio of 7%. The ratio of FFO to equity book value is important: the higher the ratio the greater the likelihood of an increase in book value per share, which ultimately drives stock value.

Dividend policy

As I write these words, shopping mall REIT dividend yield is higher than the yield the dividend yield on the S&P 500. But is it high enough? Visit and you will find that in today’s capital markets, a certificate of deposit - insured by the FDIC - yields 2.75% for five years. In that light, investors in shopping mall REITs should focus on capital appreciation, not a dividend yield, because the latter can be easily achieved with a simple and much safer certificate of deposit.   

Growth trends

Over a five year period, Simon Property grew its average 3-year FFO per share from $8.29 to $15.94, or 14% compounded annually. GGP Inc. had a 16% growth in FFO and Realty Income had done slightly better, with a 17% growth in FFO. This is a wonderful performance but I am uncertain how much is related to superior management and stellar operations compared to that in 2012 the average 3-year FFO was simply at rock bottom because of the Great Recession. I excluded Seritage from the discussion because the company became available to the ownership of the public only in July 2015

The most striking ratio is the price to book value. Recent investors in Simon Property or Realty Income had no difficulty paying between 10 times and 2 times the book value per share. Can you see their illogical valuation? On one hand, as indicated by the overall price decline for all companies, we deduce that capital markets view the future of owning shopping mall as a tricky business.

But on the hand, recent investors in Simon Property or Realty Income had no difficulty paying a hefty premium for the book value of the companies. In other words, those who invested in Simon Property or Realty Income, implicitly valued the net worth of the companies more than what management had reported.

Three summary points

“The test of learning psychology is whether your understanding of situations you encounter has changed, not whether you have learned a new fact,” said the Dean of Behavioral Finance, Daniel Kahneman. And in that light, I hope what you take from this article is a perspective on how the comparison of companies can serve as a good starting point to understand the relative strength between the companies and the economics of their business model in terms of profitability and leverage. Three summary points: 

First point: the four companies’ use of debt was reasonable. No company had financed its operations with debt greater than 65% of the capital structure. And in the world of real estate, where debt is prevalent and easy to get addicted to, it is a noble achievement. Seritage, in which I bought, had a ratio of debt to assets of 48%, which I expect to increase in time.

Second point: the price investors were willing to pay for a shopping mall REIT was anywhere between 10 times and 21 times the FFO per share. And so, if you are looking to purchase a shopping mall REIT, there has to be a rational reason why you would pay above or below that multiple.  

Third point: financial numbers are a good starting place. But they are never enough. While a review of the price to FFO and price to book value provided some guidance as to the relative attractiveness of Seritage compared to the other three real estate companies, to understand the investment merit behind Seritage, of bringing a portfolio of shopping malls to market rents, you would need to read the annual report. 

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