Mall REIT sector (long General Growth Properties) GGP
Market-feared mall-REIT collapse never arrived: leverage fell, $18bn equity was raised, cap rates compressed, and tenants now generate cash — making mall REITs still cheap versus Treasuries.
Thesis
In December 2009, Pershing Square argued that mall REITs — crushed through early 2009 on fears of depression, tenant bankruptcies, and a cap-rate blowout — had decisively escaped the worst. Since May 2009 leverage fell from 59% to 52%, the sector raised $18bn of equity (about 10% of market cap), implied cap rates compressed from near 10% to 7.8%, occupancy held near 91%, and feared store closures were absorbed by white-knight buyers like Golden Gate and Vornado. Meanwhile tenants had restructured toward cash flow — Q3 operating cash flow rose 125% for anchors and 156% for in-line tenants — setting up a virtuous cycle of expansions, new concepts, and rising mall occupancy. With mall cap rates still ~150bps above Baa corporates, Pershing argued mall REITs remained cheap relative to Treasuries, TIPS and investment-grade debt.
SCQA
Mall REITs own America's regional shopping malls — levered landlords whose earnings depend on tenant retailer health and financing markets, both in severe distress entering 2009.
Investors feared a depression-era collapse: tenant bankruptcies, cap-rate blowout, rent relief, balance-sheet insolvency. Those fears priced the sector for liquidation, but nearly all have turned out to be overblown.
Own mall REITs now. Fundamentals have inflected — REITs have delevered and raised $18bn of equity, tenants have recapitalized and shifted to cash-flow focus, and store closures have been absorbed.
With implied cap rates of 7.8% — roughly 150bps above Baa corporates and well above 10-year Treasuries and TIPS — mall REITs are cheap, with a virtuous cycle of tenant expansion ahead.
The three reasons
- 1
Mall REITs still trade at 7.8% cap rates vs. 6.3% Baa — a historically wide spread
- 2
Store closure fears were overblown; white knights absorbed bankruptcies and many tenants expanded
- 3
Tenant cash flows swung from deeply negative to materially positive on lower inventories
KPIs cited
Pattern membership
Composition what's on the 68 slides
Slide gallery ·
Notes
Delivered at the 2009 Great Investors' Best Ideas / Value Investing Congress period (Dec 7, 2009). Framing device: Buffett's 'If you wait for the robins, spring will be over' — classic contrarian-timing rhetoric. Structure is SCQA with strong before/after symmetry: the opening 'At the Beginning of 2009' bullet list (p3) is repeated verbatim near the close and re-inverted into a checkmarked 'The World Has Improved Dramatically' slide (p50). Management CEO quotes (Simon's Sokolov, Macerich's Coppola) are used SUPPORTIVELY to corroborate the thesis — the opposite of the Ackman-style 'CEO-contradiction' pattern seen in adversarial decks. Introduces a memorable frame — 'Old Paradigm: Sales / New Paradigm: Cash Flow' (p40) — and closes with a rhetorical comparison slide (p66): 'Which would you rather own? 10-yr Treasury at 3.4%, TIP at 1.3%, or a mall REIT at 7.5% cap rate?' Not an activist campaign per se — this is a bullish sector thesis supporting Pershing's disclosed long GGP position (GGP was in Ch. 11 at the time; Pershing was its largest unsecured creditor and eventual emergence sponsor). Visually utilitarian 2009-era blue/white Pershing style — predates the polish of the Canadian Pacific 2012 deck. Cover page credits only the firm, not a named author — left null.