Last week was eventful for the U.S. largest mall operator Simon Property ( SPG ). The company swiftly withdrew its hostile takeover bid for Macerich ( MAC ) after the latter rejected its sweetened offer of $23.2 billion (including $6.4 billion in debt), citing it as too low. The combination would have created one of the largest shopping operators in the U.S., giving Simon Property supremacy over the nation's best shopping malls.
Simon Property raised its offer to acquire the smaller mall rival on March 20 to $95.50 per share from $91.00 made in early March. The company called this the 'best and final offer' and had disclosed its intension to scrap the takeover should it fall apart. The failed effort represents the third major deal-making setback for Simon in over a decade. The company tried to buy Taubman Centers and made four attempts to acquire General Growth Properties ( GGP ) in 2009 but was rebuffed (read: A Comprehensive Guide to REIT ETFs ).
However, the failed bid is unlikely to hurt Simon Property's future growth story given the encouraging industry trends in which it operates. This could easily be depicted by the latest data from the International Council of Shopping Centers (ICSC) and the National Council of Real Estate Investment Fiduciaries (NCREIF) that revealed strong growth in the U.S. shopping center industry, in particular the malls.
At the end of Q4 2014, occupancy rates broke the second-quarter 2008 record to hit the highest level of 92.7% at shopping centers. The quarter also saw the 27-year high occupancy rate of 94.2% at malls. Base rents at shopping centers rose 6.5% year over year in 2014, representing the strongest gain since 2008 and the third annual gain in a row. Meanwhile, base rents at malls jumped 17.2% last year, marking the strongest annual gain since ICSC and NCREIF began tracking the data series in 2000.
Further, within 48 hours of scrapping its Macerich offer, the mall operator announced a buyback program of up to $2 billion over the next two years to enhance its shareholders' value. Apart from this, the growth levels for SPG are quite impressive. The company has seen earnings estimates rising 0.7% for the current year over the past 60 days to $9.76, which represents year-over-year growth of 9.61% (read: REIT ETFs for Income and Diversification ).
Further, the stock currently has a Zacks Rank #3 (Hold) and a solid Zacks Industry Rank in the top 39%, underscoring the company's solid position in the coming months. Moreover, the stock gained nearly double digits in the year-to-date timeframe, clearly crushing the retail sector benchmark by a wide margin. Notably, the S&P Retail Select Industry Index added 5.6% so far in the year.
How to Play with ETFs?
Given the bright outlook, the ETFs having a large allocation to this REIT will be in focus in the months ahead. Below, we have highlighted some ETFs that could be great picks for investors seeking a diversified exposure to the industry too with lower risk. These products have a Zacks ETF Rank of 3 or 'Hold' rating (read: REIT ETFs Hit a Bump as Simon Property Posts Mixed Q4 ).
Schwab US REIT ETF ( SCHH )
This fund follows the Dow Jones U.S. Select REIT Index and holds 97 securities in its basket. Out of these, SPG takes the top spot accounting for 10.1% share. More than half of the portfolio is allotted to large caps, followed by 26% in mid caps and the rest in small caps. The fund has amassed $1.3 billion in AUM and trades in good volume of about 267,000 shares per day. It is an extremely low-cost choice in the space, charging just 7 bps per year. The fund is up 5.2% so far in the year.
SPDR Dow Jones REIT ETF ( RWR )
RWR is one of the popular ETFs in the real estate space with AUM of $3.3 billion and average daily volume of about 290,000 shares. It follows the Dow Jones U.S. Select REIT Index, charging 25 bps in fees per year. In total, the fund holds about 93 securities in its basket with SPG taking the top position at 10.1%. Similar to SCHH, the State Street product is also skewed toward large cap stocks at 53% followed by mid and small caps. The fund has returned 5% in the year-to-date period (see: all the REIT ETFs here ).
Wilshire US REIT ETF ( WREI )
This fund manages about $21.2 million in its asset base and provides exposure to a basket of 116 stocks by tracking the Wilshire US Real Estate Investment Trust Index. The ETF has 0.33% in expense ratio while volume is light at under 2,000 shares. Here again, SPG is the top firm with 9.6% allocation. While large cap stocks account for 49%, the rest is evenly split among mid and small caps. WREI is up 3.5% so far in the year.
Active U.S. Real Estate Fund ( PSR )
Investors looking for active approach could find PSR an intriguing choice. The fund looks to generate alpha over the FTSE NAREIT All Equity REITs Index, with focus on both capital and current income growth. Holding 50 stocks in its basket, Simon Property occupies the top position with 9.5% share. Similar to WREI, the product focuses on large caps with equal weights to mid and small caps. PSR is often overlooked by investors with AUM of $52.7 million and average daily volume of under 3,000 shares. Expense ratio came in at 0.80%. The fund has added 2.3% so far in the year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.