Acquisition fever has swept the normally placid world of real estate investment trusts, sending the prices of many of the best buyout candidates on unusual speculative surges. Simon Property Group ( SPG) started the buyout ball rolling a couple of months ago when it announced the purchase of discount outlet mall operator Chelsea Property Group ( CPG) at a premium that shocked a lot of people. Then, last Friday, General Growth Properties ( GGP) moved the ball further forward when it announced that it would buy Rouse ( RSE) for $67.50 a share, well above the $55 the well-diversified REIT had been trading around at the time. This turn of events is remarkable when you consider these stocks had undergone an unprecedented crash back in April, when a surprisingly positive employment report made everyone think that U.S. economic growth was advancing so fast the Federal Reserve would have to quickly raise interest rates. The prices of REITs fell across the board, with many of the best reaching their long-term support for the first time in years. As I explained at the time, in most cases the decline was based on a false premise and represented a terrific buying opportunity. Those April and May lows attracted meaningful new money into the sector, and REITs have since risen both on the merits of their own internal growth plus their value as a relatively safe place to hide out from the tech storms. Since July 1, the Morgan Stanley REIT Index and the Nasdaq Composite have been virtual mirror images of each other, with the former up about 7% and the latter down 10%. In past years, of course, investors have bought REITs mainly for their large dividend yields, with any capital appreciation possibilities serving as nice bonuses from time to time. But now the prices are rising like staircases in an office REIT skyscraper. Tuesday's trading saw investors favor mall operators in particular, sending shares of Macerich ( MAC) up 3.25% and shares of Mills Corporation ( MLS) up 3.25%. They yield 4.8% and 5%, respectively.
Macerich's Rich PipelineMacerich deserves the rising earnings multiple that is now being accorded to quality mall operators in major markets, and if tech continues to falter that multiple will probably continue to expand. Friedman Billings Ramsey analysts say the company has a growing mall-development pipeline that offers earnings visibility into 2008, and that it has done a nice job of redeveloping and expanding older properties. Its key asset is a dominant position in fast-growing Phoenix, Ariz. Currently sporting a $3 billion market cap, Macerich is still small enough that it could be purchased easily while also being large enough to provide a material boost to the acquiring REIT. Deutsche Bank analyst Louis Taylor said in an Aug. 5 report that he believes Macerich "can generate the best risk-adjusted returns among the mid-cap real estate stocks," with 10% earnings growth over the next four years a given.
Mills' Unique CharacterMills builds and runs malls that combine shopping with recreation and restaurants in an effort to encourage shoppers to spend more time and money in one place. Its 15 Landmark Mills Centers add a factory outlet mall to that formula. The company is creative, to say the least. Its Meadowlands Xanadu project -- a redevelopment of the dated Meadowlands complex in New Jersey -- will combine retail, movies, sports, restaurants, offices, hotels and an indoor ski resort. Morningstar analysts note that its 95% occupancy rate considerably exceeds rivals like General Growth Properties, while its rents are just a tad below that of the top mall operators. International growth is expected to add quite a bit to this story over the coming years, although financing and currency variability issues could be a problem. But with steady 15% growth and a relatively small $2.6 billion market cap, it should be an attractive buyout candidate. Significant risks to this nascent buyout boom would be sharply rising interest rates or a jolt to consumer spending that may hurt mall tenants' ability to pay their bills. Also, since the stocks have run up quite a bit lately, they aren't urgent buys at these levels. Investors could probably wait for Macerich to return to the $48.50 to $50 area and for Mills to hit the $46 to $48 area. Both Macerich and Mills rate highly in the MSN StockScouter rating system, at 9 and 10 (out of 10), respectively. The chart below offers the rating system's top 15 REITs. I'll watch them all over the next few months, and report back regularly.
|MSN StockScouter's Top-Rated REITs|
|Company||Sym||SS #||% Chg '04||REIT Type||8/24 Close|
|The Mills Corporation||MLS||10||7.7||Retail||49.65|
|CBL & Assoc. Properties||CBL||10||4.9||Retail||60.55|
|Innkeepers USA Trust||KPA||9||38.4||Hotel/Motel||11.70|
|Simon Property Group||SPG||9||17.3||Retail||55.84|
|The Macerich Co.||MAC||9||14.6||Retail||52.66|
|Developers Diversified Realty||DDR||9||12.7||Diversified||38.00|
|Source: MSN StockScouter|