Nov 17, 2015
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U.S. REIT investors uneasy after Nordstrom profit warning

Nov 17, 2015

REIT investors have a new reason for angst, following an across-the-board slowdown in sales announced by department store operator Nordstrom Inc last week.

The highly regarded retail chain surprised the market on Thursday by cutting its full-year profit forecast without explanation. It said only that traffic both at its stores and among online shoppers was down.

Shares of Nordstrom fell about 15 percent, and shares of mall operators Simon Property Group Inc, General Growth Properties Inc, Taubman Centers Inc and Macerich Co also fell, though far less. The S&P 500 Real Estate Investment Trust index fell 1.3 percent on Friday but has since recovered those losses.

Headwinds at Nordstrom are a concern for REIT investors as top-tier malls, where the department store is an anchor, have long been considered immune to the woes suffered by strip malls and less appealing or poorly located shopping centers.

The better mall operators have been able to handle a constant churn of tenants and fill storefronts with new and desirable tenants. But the closure of several dozen department stores could prove problematic if that were to occur.

"The challenge is if a lot of these department stores start to get distressed or falter at the same time," said D.J. Busch, an analyst with Green Street Advisors in Newport Beach, California.

Nordstrom told analysts last week on a conference call that it was in a strong position and not on its heels. Along with Nordstrom, the lowered outlook at Macy's Inc, among others, once again raised investor concerns about retail sales in a tepid economy, amid recurrent worries that shoppers are moving their business online.

Whenever there is negative news about a shopping center or mall tenant, the immediate reaction is to go after the mall operators and short their stocks, said Alexander Goldfarb, an analyst at Sandler O'Neill + Partners in New York.

Of the major mall REITs, only Macerich has had a notable increase in short bets in the last few days. About 11 percent of the shares available to borrow for shorts were being used for this purpose as of Monday, according to Markit, which tracks short interest. That is up from 3 percent last Thursday.

Overall, the S&P REIT Index is down 3 percent on the year.

Mall tenants will pay their rent, so there is no impact to the landlord, Goldfarb said. The bigger point is that the composition of mall tenants has changed in recent years, with restaurants and stores by Apple Inc or Tesla Motors Inc becoming bigger players, he said.

"All the tenants that used to be and are not any more, those tenants have gone, there's constant churn," Goldfarb said. 

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