Summary: REIT Pair Trade
With more shoppers turning to online avenues, we expect brick and mortar shopping malls will continue to lose relevance and value. At the same time, companies are increasingly eager to compete with Amazon (Nasdaq:AMZN) by offering fast shipping. To do so they are leasing logistics centers and warehouses near cities and busy areas. We expect these market trends to put pressure on mall REITs and benefit logistic REITs. Our firm recommends an equal weight pair trade, going long Prologis (NYSE:PLD) and short Simon Property Group (NYSE:SPG).
Specifics: Long Prologis and Short Simon Property Group
Our firm recommends a pair trade position given our agnostic views on the REIT market overall. By going long Prologis and short Simon Property Group, investors are able to take a market neutral approach that hedges against the sector and overall REIT market. This approach limits investors to stock-specific risk, which is the focus of our analysis. Given the pressure on mall REITs and the positive market trends for warehouse REITs, we expect Prologis to increase further (or decrease less) than Simon Property Group, regardless of how the market reacts.
There are several reasons why Simon Property Group stood out as the worst performing mall REIT and why Prologis was selected as our long warehouse REIT, which are detailed below.
Simon Property Group
Simon Property Group is the largest retail-focused REIT in the US, consisting of 108 malls, 67 outlets, 14 mills, 4 lifestyle centers, and 13 other retail properties. The REIT’s pure focus on malls puts it at high risk for retail closings. In its SEC filing, Simon Property Group states, “some of our properties depend on anchor stores or other major tenants to attract shoppers and could be adversely affected by the loss of one or more of these anchor stores or major tenants.” SPG lists the retail anchors and selected major tenants in each of their properties, and Sears (Nasdaq:SHLD) is included in 76 of them (~77% of the properties). Other major retail tenants included: Macy’s (NYSE:M), JC Penney (NYSE:JCP), Target (NYSE:TGT), and Dicks Sporting Goods (NYSE:DKS), all of whom have recently announced store closings and seen their stock prices drop.
