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Actionable news in SPG: SIMON PROPERTY GROUP Inc,

Time To Get More Constructive On…Malls?

Boenning & Scattergood's Floris van Dijkum takes a look at the real estate sector today, specifically malls, writing that things may finally be looking up for A-level (highest quality) malls.

He writes t hat during the second quarter, A mall fundamentals improved, producing 3.7% same-store sales net operating income growth, on average, although B mall, or less high quality malls, continued to struggle with same-store sales growth and falling tenant sales.

Given the improving trends for A malls, whose shares have been hurt by the numerous negative headlines about retail, he writes that it may be time to get a bit more constructive on the names:

The ‘A’ mall sector currently trades at a 38% discount to net asset value (NAV), the widest at any point over the past five years. While mall REIT shares continue to be influenced by bad news from retailers and department stores, we believe a mall investor with a two-year horizon should be rewarded handsomely. At the risk of being early, we are becoming incrementally more constructive on ‘A’ malls with three Outperform-rated names.
We believe that ‘A’ mall owners will be long-term winners, as highly productive bricks-and-mortar locations remain the cheapest form of distribution for retailers, and have been delivering solid fundamental growth due to sticky demand from both consumers and retailers, who increasingly include more previously pure-play ecommerce companies opening physical locations.

He reiterated Outperform ratings on A mall leaders Simon Property Group (SPG) and GGP (GGP), writing that both trade at meaningful discounts, with plenty of cash flow to self-fund large redevelopment projects.

He also upgraded Macerich (MAC) to Outperform, citing the company's "solid SS NOI growth, attractive releasing profile, growth in tenant sales, and high-quality portfolio."

But he also downgraded Washington Prime Group (WPG), citing the company's expensive NAV relative valuation after its recent rally. He also has Underperform ratings on Seritage (SRG) and Tanger Outlets (SKT), given funding concerns and their exposure to C-level locations.

The SPDR Dow Jones REIT ETF (RWR) and the SPDR S&P Retail ETF (XRT) are both higher today.


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