In today's tight lending environment commercial financing options for mall owners and developers aren't nearly as attractive as the peace of mind that comes with reducing existing debt. Large real estate investment trusts (REITs) like General Growth Properties (NYSE:GGP) are saying "No" to new domestic development and "Yes" to opportunities abroad. Investors with a long-term horizon can benefit from investments in REITs as their dividend payments shield them during tough market environments.
REITs in a Nut Shell
REITs are required to distribute at least 90% of their taxable income to investors. The distributions take the form of dividends. REITs typically invest in real estate like apartment buildings, hotels or, in the case of GGP, shopping malls. (To read more on REITs, check out The REIT Way and What Are REITs?)
Who is GGP?
General Growth Properties, the second largest mall owner in the U.S., is currently paying an attractive 5.3% yield while the No.1 mall owner, Simon Properties (NYSE:SPG) has a 3.5% yield. Other REITs to consider include Macerich (NYSE:MAC) and Taubman Centers (NYSE:TCO).
Two of GGP's most exciting developments include its Ala Moana Center in Honolulu and its Las Vegas property Fashion Show mall where retail lease space is nearly $1,000 per square foot. For the first quarter of 2008, GGP's occupancy rates at its 200 properties remained above 92% and net operating income increased slightly over the prior year.
GGP's Rebalancing Act
Understanding that credit markets are unlikely to recover until late 2009, the company has decided to explore the following alternatives to meet its financing needs.
- Spending Reduction - During the first quarter conference call, GGP officials identified $600 million in cost savings that would have been spent on new developments in the U.S.
- Joint Ventures - GGP also mentioned being open to selling a portion of its real estate portfolio for a cash infusion.
- Equity Sales - Earlier this year GGP issued an additional 23 million shares of common stock to raise capital.
Retail Sales Impact
Retail profitability is also very important to mall owners like GGP because it directly affects the ability to raise rents. Soaring oil prices, job cuts and falling home values have kept retail sales figures relatively flat so far this year. GGP does not expect stimulus checks from the U.S. government to play a major role in retail sales recovery. (Read Analyzing Retail Stocks for more information.)
Opportunity Outside The U.S.
GGP owns and has developed a handful of new properties in Brazil. The growing middle class in Brazil makes it a very attractive marketplace. Similarly, GGP completed its first shopping center in Turkey last October. The Turkey property is 100% leased and a second GGP property is under development in Istanbul. (Diversifying can mean not only investing in various asset classes, but also venturing outside your country's borders; to learn more, read Going International .)
Why bother with REITs?
Despite a downturn in most asset classes, excluding commodities, the Morgan Stanley REIT Index was up more than 10% for the first three months of the year. GGP was up 6% during that time frame and it also paid a 50 cent dividend to shareholders. Investors who are willing to wait out an eventual recovery of retail sales and the commercial real estate market can do so while earning decent dividends from these REITs who are structured to pay.