Time to Sell Your Mall REITs? Not Yet.

The stock market is giving a lot of love to the retail REITs lately, but the Motley Fool CAPS community isn't sold on the shopping-center developers. Tanger Factory Outlet Centers gets a mere two stars (out of a possible five) from Fools, who are evenly split between those who think it will outperform the market and those who think it'll drag behind. Simon Property Group (NYSE: SPG  ) and Taubman Centers (NYSE: TCO  ) get only one star each, and the CAPS believers in outperformance are even fewer; for Taubman, they're outnumbered 2-to-1.

If you look at where they are now, you'd be pressed to argue that the stocks aren't fully priced, maybe even overpriced. Simon just hit a new 52-week high after a blowout earnings report, and at a P/E of almost 44, it's not exactly selling at a discount. Taubman also hit a high, and at P/E north of 60, it's even richer; Tanger's P/E is almost 63. All are trading above their analyst consensus targets: $72 a share for Taubman, $150 for Simon, and $30.50 for Tanger, according to Zacks Investment Research.

So should you cash in your gains on these companies, if you happened to buy them in the dog days of the recession, when they were taking a beating?

Not yet. If you look at the macro picture -- improvements in household spending here in the States, emerging markets abroad -- there's room for upside. And the mall landlords are exploiting both the consumer culture emerging in the BRIC markets by exporting the all-American shopping mall, and the newly awakened passion for penny-pinching among U.S. consumers by focusing on outlet shopping.

The Fools are rightly down on the prospects for malls in the U.S., though, where a lot of the faster growth in retail sales is happening online, and the merchants' need for brick-and-mortar space is dropping. All the teeth-gnashing among retailers over "showrooming" is not theatrics; merchants are preparing for a future when shoppers will come to the store just to check out the products they'll order online when they get home -- or even right there on their cell phones.

Many analysts now argue that the era of the big box is over. Even the quintessential big box, Wal-Mart, is experimenting with smaller stores, as is Target. But players like Simon and Tanger are focused on outlet shopping, a retail sector that has not had as many problems showing growth in the past five years.  

And the landlords are looking outside the U.S. for growth, too. Emerging markets are still in the process of embracing mall culture in general and outlet shopping in particular. A vast mass of shoppers in the BRIC countries is just finding out that Ralph Lauren (NYSE: RL  ) and Coach (NYSE: COH  ) have outlets.

Simon, which doubled down when it bought Prime Outlets' portfolio of off-price malls in late 2009, is now busy exporting the concept abroad. It's building its ninth outlet mall in Japan and its third in South Korea, and in the past two months it has signed joint ventures to build outlet malls in China and Brazil. CEO David Simon said it's looking at a site next to Disneyland Shanghai for development.

Taubman, too is expanding in Asia, with a mall planned to open in Seoul in the third quarter and management promising more action in the region soon. CEO Robert Taubman said recently that management is "very focused on China and Korea." Tanger has only begun to expand internationally, with a Canadian joint venture that includes one existing mall outside Toronto and plans for two more.  

As Morningstar's analysts recently pointed out, the reliance on joint ventures adds some level of uncertainty to Simon's earnings, but of the three, it has been the most aggressive internationally and has the lowest P/E, which makes it the most attractive one. But it all depends on your faith in both JVs and the hunger for retail therapy in emerging markets.

During the days of the weak dollar, foreign tourists got a taste for outlet shopping and bargain hunting on these shores. We all heard the stories of Brits and Brazilians flying empty-handed into New York and Miami and leaving with suitcases full of goods. By that measure, the mall REITS still have a lot of runway left abroad, even if the U.S. remains overstored.

If you want to know about another retail play that's expanding in international markets, check out The Motley Fool's top stock for 2012. Get your free report.

Fool contributor Mercedes Cardona owns no shares in any of the companies mentioned in this article. Follow her on Twitter and her website.

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  • Report this Comment On April 28, 2012, at 6:23 PM, bear9 wrote:

    PE is not an appropriate measure for REITs. You should use Funds from Operations (FFO), which removes the distorting effect of depreciation, which is huge for real estate. By this measure, SPG is trading at 20x, while TCO is trading 24x. Still high, but nowhere the multiples you state. I am sorry to say that your failure to use the most widely accepted metric for REITs undercuts your entire analysis -- for anyone the least bit familiar with the sector, it shows you don't know much about REITs.

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