The Good, The Bad, And The Ugly

With “the good, the bad, and the ugly” you can see that there is a clear bifurcation of the high-quality Mall REITs.

Summary

  • In the same “wild, wild, west” analogy, I thought it would be fun to use this entertaining backdrop for The Good, the Bad, and the Ugly.
  • When it comes to “the good, the bad, and the ugly” you can see that there is a clear bifurcation of the high-quality Mall REITs.
  • I do have an obligation to provide the best possible research so that you can make actionable decisions that includes providing you a list of the “most wanted” sucker yields.

It seems that Seeking Alpha has become a battle field of sorts, as some of the gun-sling’n market timers have squared off with the defensive dividend growth investors in the fight for supremacy.

It’s an age-old dual in which the creed of the speculator – “I want to make a lot of money on little capital in a short time without working for it – and the creed of the intelligent investor – “buying sound securities where principal is safe and he gets a fair return on his money” – becomes the line in the sand.

As the co-author of The Intelligent REIT Investor, I am a little bit biased when it comes to utilizing gun powder safely. I’ll remind you what Frank J. Williams said in this classic book, If You Must Speculate, Learn The Rules,

“This is a matter of cold, hard common sense and safety. It is absolutely unsafe to gamble in stocks unless the trader can protect himself at all times. It is wiser to build up substantial reserves before invading in the stock market than to fritter away money in hopeless attempts to beat it.”

One of the most popular places for debating stocks has been in the Mall REIT sector. Just last week, a popular "yield chaser" on Seeking Alpha explained,

“We do think that the high risk is very well compensated, given the current very generous yield of 14.1%, in addition to the potential price appreciation in our "base case" and "best case" scenarios. This same thesis applies to many other retail REITs trading at bargain valuations. At the current valuation, we rate CBL as a Strong Buy.”

In the face of relentless negative narrative over the disruption of brick-and-mortar by e-commerce, the Mall REIT sector has become a hot bed for gun sling’n. Some believe the worst is over, and others think there is more pain on the way.

One way to better analyze the sector is by taking a closer look at the business model, to determine how the REIT players are best-positioned to battle e-commerce. In the same “wild, wild, west” analogy, I thought it would be fun to use this entertaining backdrop for one of my favorite movies, The Good, the Bad, and the Ugly.

To help produce this content, I used research provided by Floris van with Dijkum, Boenning & Scattergood, Inc. In a research report he explains that “the mall sector is the most consolidated real estate sector in the U.S. as the high values for the best assets create natural barriers to entry.”

This translates into the “economic moat” concept that Warren Buffett describes when looking to purchase a business. The billionaire investor pays careful attention to a business he understands not just in terms of what the business does but also of “what the economics of the industry will be 10 years down the road, and who will be making the money at that point.”

 "Two men in costumesDescription generated with high confidence"

Dijkum explains that his company’s “analysis suggests the listed mall owners control approximately 80% of the ‘A’ malls in the U.S. and have a more highly concentrated portfolio. The five largest assets represent approximately 28% of portfolio value based on estimates, and are worth on average $5.4 billion. While we have been an out-of consensus voice in the market, we hope that investors get a more granular understanding of the inherent value in the mall sector after reading this report.”

The Good