There is an interesting discussion going on right now on the internet about the future of REITs, specifically mall REITs.
The discussion began when Bill Ackman (who made a lot of headlines after profitably betting on the downturn) gave a presentation, the summary of which can be found here (link to The Business Insider). The presentation was titled “If you wait for the robins, spring will be over,” and basically he argued that REITs are terribly undervalued because investors are not taking into account a recovery in retail spending (we have covered retail twice before, here (Nov 25) and here (Oct 19)). The presentation began with a few slides about the economic recovery, about the reversal in unemployment, GDP decline, and Bernanke’s comment that the recession is “most likely over.” The meat of his presentation revolves around how the smart money has been piling into REIT Equity and Debt investments for months now. He mentions how few bankruptcies have gone into Chapter 11, that instead there have been no apparent shortage of “white knight” investors. He then references a Citigroup report that predicted holiday sales increasing by 2.5% YoY, and finishes up by asking whether investors would rather hold Treasuries with the incredibly low yields, or a REIT stock with 6-7% Cap Rates, the assumption being that REITs currently offer great risk/reward ratios.
The counter argument, presented by Hovde Capital Advisors (found here, again via The Business Insider), focuses mainly on the consumer retrenchment that is going on as a result of the economic downturn. In the presentation, slides show the uptick in the savings rate which is trending back towards the long-term average, the decline in available consumer credit including home equity, and how online sales are increasing as a percentage of overall sales as consumers focus on value per dollar spent. The summary is that non-mall retailers (WMT, COST, TGT) and online stores (AMZN) offer better value, and consumers are flocking to them. They then go into financial statement analysis, using General Growth Partners (GGP) as a representative sample, and show that cash flows have decreased by 27% since last year, new rental rates are significantly lower than existing rents, and that Bill Ackman’s data on Cap Rates is old given recent transactions.
My analysis is that yes, Bill Ackman is correct in saying that the economy is improving, or at least stabilizing. However, it is hard to believe that consumers will revert to their pre-financial crisis levels of spending, at least in the short term. I believe we still have years of low consumer confidence and spending to slog through as people reflect on their tired balance sheets, and concentrate on building equity. Certainly, history has shown that people do not generally learn from their mistakes, and “history is doomed to repeat itself.” Over time, consumer confidence will recover and people will start spending again. But it will be a tough slog for mall retailers, and that will make REITs suffer. Because there is so much consumer flight to online retail, I give about a 40% chance that the age of the mega-mall has died (honestly…good riddance) to be replaced by smaller outlets and online stores. To make money from this trade, I would not invest in Amazon (right now at least, see my previous post), but I would invest in healthy non-mall brick-and-mortar retailers that have a strong presence online (WMT is a great example). REITs are by no means a safe bet right now.
Disclosure: Long TGT, no position in any other stock mentioned.
In a fairly significant departure from the normal postings on this blog, I refer readers to this article that appeared on the blog: A Dash of Insight. In it, the author talks about the ways individual investors must approach the markets, and discusses the various mindsets and common fallacies that undermine much of the research that is done. It is a very interesting read, and well worth it for anyone who is currently, or is thinking about attacking the investment world by themselves.
We have mentioned before the talk on the street about fund managers unwinding positions in order to lock in the gains they have made this year. This has been talked about for a few weeks now, and it would seem that any manager who wanted to lock in their gains would already have done so.
According to a new Bank of America Merrill Lynch report (reported here, at the Market Folly blog) however, it would seem that Hedge Funds are still very much long the market, and have actually increased their equity exposures so far in December. In fact, overall Hedge Fund assets have exceeded $2 trillion for the first time since 2007. This would give credence to the idea that there is still a lot of money still at risk, and if the markets do not show some signs of life before the end of the year, we could very well see a lot of that money go to the sidelines.
Disclosure: Remaining long the market, no specific stocks mentioned.
Great article in Barrons, by their Techincal Analyst Michael Kahn and found here, that draws attention to the growing flight from risk.
The premise is that investors, during the course of this rally but increasingly as equity values have grown, have been struggling to find value in risky assets and have been moving money into risk-free treasuries. Kahn draws attention to the treasury/corporate bond etf ratio, which recently broke out and is rising again, indicating money flow from corporates in favor of treasuries.
This trend is interesting, because it puts in context all the comments that investors and traders have been making about the mountains of cash that is still sitting on the sidelines. If investors are taking the money that is already invested in risky assets and moving it into relatively low-yielding but risk-free treasuries, then they certainly aren’t putting in any new money. Yet again more evidence that this rally is running into some significant overhead pressure.