Taubman Centers: An Attractive Mall REIT That Offers A Solid Dividend Yield

The shopping center/mall REIT sectors has been routed over the last couple of years, as worries about the brick and mortar retail space have led to massive share price declines in lower-grade mall operators, while higher quality landlords were punished too – just not as severely.

Over the last three years, Shopping Center REITs have averaged a decline of 7% while Regional Malls were down 15%!

Not all of the mall REITs are created equal, though – there are large differences in terms of the quality of the assets that these REITs own, and there are large differences when it comes to balance sheet strength and liquidity.

Taubman Centers ( TCO) is one of the higher-quality mall REITs. The company has strong fundamentals, its assets are of high quality, and the underlying performance of its malls is strong. It looks like a relatively safe pick in this segment of the REIT space. Shares offer a solid dividend yield, and it seems likely that both it’s dividend, as well as its share price, will continue to grow in the long run.

Company Overview

Taubman Centers is a real estate investment trust that owns, leases, develops, and manages regional shopping centers. It was founded in 1950 and is headquartered in Bloomfield Hills, MI. The company has a market capitalization of ~$3.0 billion right now, which makes it one of the top 15 retail-focused REITs in terms of size and scale.

While it is active in several US states, the company also owns assets in overseas markets, such as South Korea and China.

This is a positive differentiator, as the international exposure provides some geographic diversification, particularly because of the differences in characteristics of the retail landscape  in the Asian markets where Taubman Centers is active. Compared to the US, the amount of retail square footage per capita in Asia is much lower.

The shopping center REIT industry and Taubman Centers’ peer group

The United States is the nation with the largest per-capita retail square footage, raising the question of whether all of that retail space is really needed – and – if not – what will happen to the excess and how long before pricing becomes unattractive for a landlord?

Source: statista.com

Other nations, including large, developed economies, have much smaller retail space relative to their population sizes compared to the US. This is due to the fact that there is a lot of geographic space in the US (compared to countries such as Spain, Italy, and Germany), and also due to the fact that the US has always had a consumer-driven economy.

The enormous size of the US retail space means that the US brick-and-mortar retail industry is somewhat vulnerable to store closures, a threat that is amplified by the trend of online shopping: The more consumers order from their homes or on the go, the less they spend at brick and mortar stores. This has led to a situation that some deem the retail apocalypse — stores that are not profitable any longer are being closed, which means that vacancy rates at certain malls and shopping centers are increasing. This, in turn, puts pressure on the owners and operators of this retail space that is no longer needed. 

Not all shopping centers and malls are created equal, however. The trend is impacting lower-grade malls (and their owners/operators) more so than the higher quality malls with higher sales per square foot. The REITs that own higher-grade and prime assets are less concerned about lower demand for retail space, as most brands and retail companies still require and actively seek out retail space in great locations. Taubman Centers, together with peers such as Macerich ( MAC) and Simon Property Group ( SPG), belong to the group of high-grade mall/shopping center operators that have fared somewhat better than the sector overall.

While CBL & Associates (CBL) and Pennsylvania Real Estate Investment Trust (PEI) lost 34% and 26%, respectively, over the last three years, Taubman declined only 8.6%, better than the 13% decline by Macerich, but trailing Simon Property’s 1.5% return – the only Mall REIT with a positive 3-year return.

Taubman Centers’ high-quality assets should allow for outperformance throughout the coming years

Taubman Centers owns and operates a total of 26 malls, with the majority of those being located in the US (including Puerto Rico):

Source: Taubman Centers’ presentation

The company’s retail assets are located in California and on the East Coast primarily, with many of the shopping centers being located in attractive, large cities. It also owns two shopping centers in China and two shopping centers in South Korea.

While it is not the largest Retail REIT, its relentless focus on quality assets gives the company the premier portfolio in terms of the quality of its assets:

Source: Taubman Centers’ presentation

80% of Taubman’s malls are rated grade A, whereas only 23% of US malls have a rating of A+ or better – an indication of the breadth and level of quality of its portfolio. This makes Taubman Centers significantly less vulnerable to changes in the US brick and mortar retail industry, and has allowed the company to report solid results on a consistent basis.

According to Green Street Advisors, it has the highest concentration of assets in the Top 50 US markets while tenant sales per square foot continues to be one of the highest in the industry.

During the most recent quarter, Taubman Centers delivered very strong results on several metrics: Its mall tenant sales per square foot rose by 5.8%, comparable center net operating income rose by more than 9% during the quarter, and it was able to grow its funds from operations (adjusted for one time items) by 22% compared to the prior year’s quarter. Funds from operations per share rose to $1.01, which led management to increase its full-year guidance to $3.76 – $3.84.

Robert S. Taubman, the CEO of Taubman Centers, pointed out that the company’s newest assets in Asia, the CityOn Xi’an (China) and the Starfield Hanam (South Korea), continued to perform very well in terms of sales per square foot and net operating income. Taubman Centers’ decision to move into the mall markets in these countries looks like a very smart move that positions the company for above-average growth over the coming years. Taubman Centers could expand its portfolio further in these countries, where retail sales are growing at a higher pace compared to the US.

Balance sheet strength as a competitive advantage during times of rising interest rates

Taubman Centers has a very healthy balance sheet, which is positive due to two reasons: The company will be able to finance the acquisition and/or development of new assets (e.g. in Asia) easily. At the same time, rising interest rates and tougher debt markets will not be a major headwind for Taubman Centers, whereas this could hurt more highly leveraged retail REITs.

Source: Taubman Centers’ presentation

Taubman Centers also has a very well-laddered debt maturity schedule that will limit the impact of rising debt costs in the near future.

Source: Taubman Centers’ presentation

Only a small amount of debt matures during 2019-2021, and it is very likely that Taubman Centers will be able to refinance this debt easily. 2022 will be a year of larger maturities, but the majority of Taubman Centers’ debt matures beyond that. The company’s high-quality assets and its strong balance sheet results in relatively low effective interest rate of less than 4%. With attractive cost of capital, Taubman can readily make accretive acquisitions and/or develop new assets while maintaining a relatively low bar for returns on investment – which can be a competitive advantage during the bidding process and/or provide the company with a higher return than competitors burdened with higher costs of capital.

Taubman Centers’ stock looks attractively valued and provides a high income yield

Taubman Centers expects to report FFO per share of $3.80 (at the midpoint of management’s guidance) for fiscal 2018 during the upcoming earnings report. With shares trading at $50 right now, shares are valued at 18 to 19 times 2018’s AFFO, which is quite undervalued in our opinion – considering the stock typically trades at a P/AFFO of 25x.  Investors also get a dividend yield of 5.2%, which means that even in a no-growth scenario – which we don’t foresee – investors can potentially realize high single digit returns with slight multiple expansion plus the dividend. If the company generates any growth, then returns in the mid-teens are very likely.

That is a very conservative assumption, though, as Taubman Centers should be able to grow its FFO per share consistently going forward, through the opening/acquisition of new assets, and through ongoing growth in Taubman Centers’ net operating income at existing shopping centers.

Bottom line

Taubman Centers is not an overly large retail REIT, but one that stands out due to the high quality of its asset base. It should continue to perform well operationally, as the retail ‘apocalypse’ impacts lower-grade mall operators – which in turn will further benefit higher quality owners like Taubman.

Taubman Centers’ exposure to higher-growth Asian markets also provides some level of diversification and potential for attractive growth during the coming years even if it us currently only a small part of the portfolio.

The stock is trading at P/AFFO multiple that is least at 20% discount to its long-term AFFO multiple and offers a decent yield of 5.2% at the current market price. With a current payout ratio of 69% – a bit high but not dangerously high in our opinion – there could be potential dividend increases as well. It last raised its dividend by $0.03 in March 2018 and we could see another $0.03 in the early part of 2019 as well.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TCO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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