Taubman Centers Witnesses Top-Line Pressure: Time to Sell?

Taubman Centers’ TCO near-term performance remains under pressure due to the prevalent unfavorable retail environment.

For the ongoing quarter, the Zacks Consensus Estimate for revenues is pegged at $144.9 million — reflecting a 5.44% year-over year decline.

Understandably, amid changing shopping habits of consumers and e-commerce boom, retailers are compelled to rationalize their physical footprint. This has led to widespread store closures across many malls. Further, retailers unable to contend with the likes of Amazon.com, Inc AMZN and Walmart, Inc WMT are eventually opting for bankruptcy filing.

In addition, as tenant bankruptcies and store closures are expected to persist in the retail space in the upcoming quarters as well, occupancy, leasing spreads and same-store net operating income (SSNOI) growth may remain suppressed.

Moreover, tenants are negotiating steep reductions in rents on renewal leases, which mall landlords, including Taubman Centers, GGP Inc. GGP and Macerich Company MAC, find unjustified.

Taubman Centers also witnessed marginal downward revision in the Zacks Consensus Estimate for the current-year funds from operations (FFO) to $3.79 over the past week.

Also, shares of this Zacks Rank #4 (Sell) company have underperformed the industry over the past six months. Its shares have gained 8.7% as compared to the industry’s rally of 13.7%, during the same time period.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the April-June quarter, Taubman Centers posted adjusted funds from operations (FFO) per share of 87 cents that came in line with the Zacks Consensus Estimate. However, the company witnessed lower occupancy during the quarter. Notably, ending occupancy in comparable centers was 92.2% at the end of the quarter, down 1.1% year over year, while leased space in comparable centers was 94.9%, down 0.7%.

Also, given its international presence, the company often faces unfavorable foreign currency movements, which dents its top-line growth. Furthermore, the regional shopping center industry is seasonal in nature, with the fourth quarter recording the highest levels of mall tenant sales owing to the Christmas season, while in the first quarter, most leases are slated to expire. In addition, bulk of new store openings take place in the second half of the year. This renders volatility in the company’s performance.

Lastly, hike in interest rate can pose a challenge for the company. Essentially, rising rates imply higher borrowing cost for the company, which may affect its ability to purchase or develop real estate and lower dividend payouts as well. Additionally, the dividend payout might become less attractive compared to the yields on fixed income and money market accounts. In fact, for 2018, management anticipates consolidated and unconsolidated interest expenses to be $189-$192 million.

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