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REITerating Our Conviction On High Quality Retail REITs: Malls

Chilton REIT Team profile picture
Chilton REIT Team


  • The erosion of value for publicly traded mall REIT has gone well beyond any data we have seen and is approaching a point beyond any scenario we could reasonably imagine.
  • From the data we have seen, a brick-and-mortar presence is essential for a retailer to produce profits over the long term.
  • While the growth of e-commerce will continue to cause store (and even mall) closings, we believe the high quality locations with well-capitalized owners will survive and thrive.
  • Although investing in this out-of-favor segment today carries significant headline risk, there could be numerous catalysts over the next 12 months that will demonstrate the public market mispricing for these companies.

Stock performance over the long term should be based on fundamentals, but short-term performance can be heavily influenced by sentiment. Nearly impossible to quantify, sentiment can most certainly be felt, seen, and heard. We believe the recent collapse in mall and shopping center REIT share prices may be the product of one-sided anecdotes, misleading data, and, frankly, shallow research.

Brick-and-mortar has been and will likely continue to be the most profitable distribution point for retailers. We believe Amazon’s (AMZN) offer to buy Whole Foods (WFM) reinforces the necessity of a physical presence. Importantly, WFM boasts some of the best demographics among its grocer peers, which we believe specifically highlights the attractiveness of well-located shopping centers.

Our bull case on retail real estate is by no means based on a bear case for e-commerce. E-commerce is having a sizable effect on brick-and-mortar retail, but not all real estate was created equal. We believe this pullback has provided investors with a historic buying opportunity in high quality retail REITs as it seems to be completely based on sentiment, while ignoring hard data.

The Truth About E-Commerce

From media reports that highlight only the shuttered malls and speak of Amazon as if it will take over the world, a casual investor might think that a majority of retail sales are done online, and someday, there will be no need for stores. Even using the most generous definition, e-commerce only accounted for about 9.2% of total retail sales (ex-food) in 2015. After making adjustments for mail order drug delivery, items shipped from store inventory, and ‘non-merchandise items’ (includes shipping and handling costs), we estimate the actual number was 5.7% in 2015. By making estimates based on data available today for 2016, we believe our adjusted e-commerce figure was about 6.4% of retail sales in 2016.

This article was written by

Chilton REIT Team profile picture
The REIT Team of Chilton Capital Management, a Houston-based investment adviser, is headed by co-portfolio managers Bruce Garrison, CFA, and Matt Werner, CFA. Mr. Garrison has over 40 years of experience analyzing public REITs both on the buy-side and the sell-side. Mr. Werner joined Mr. Garrison on the Chilton REIT Team in 2009. The REIT Team’s strategy primarily pursues investments in publicly traded real estate investment trusts (REITs) and real estate related entities based primarily in North America. The REIT Team believes public REITs are superior vehicles for investing in real estate due to their liquidity, transparency, and total return characteristics. Investing in public securities enhances the REIT Team’s ability to diversify by geography, sector, strategy, property, and tenant while maintaining portfolio liquidity. REIT property types include apartments, regional malls, shopping centers, lodging, office, industrial, self-storage, data centers/cell towers, and a variety of health care related facilities. The REIT Team focuses on traditional methods of security analysis; primarily research, critical thought and analytical depth, which are integral to their investment process. The REIT Team’s investment approach seeks to combine its real estate industry experience with traditional methods of security selection to make sound investment decisions in real estate companies. The Chilton REIT Team manages Separately Managed Accounts (SMAs) for high net worth individuals and institutions. Additionally, the REIT Team is the sub-advisor for an open-end investment company, the West Loop Realty Fund (tickers: REIIX, REIAX, and REICX). Before investing one should carefully consider the West Loop Realty Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by calling 800-207-7108. Please read the Fund’s prospectus or summary prospectus carefully before investing. The Fund may not be suitable for all investors. We encourage you to consult with appropriate financial professionals before considering an investment in the Fund. Liberty Street Advisors, Inc. is the advisor to the Fund. The Fund is part of the Liberty Street family of funds within the series of Investment Managers Series Trust. The Fund is Distributed by Foreside Fund Services, LLC. Chilton Capital Management, LLC is an independently owned and operated firm formed in 1996. Chilton provides investment advisory services for registered investment companies, private clients, family offices, endowments, foundations, retirement plans and trusts. For more information about Chilton Capital Management’s REIT Team, please visit www.chiltoncapital.com/reit/ or email info@chiltoncapital.com. Additional information about Chilton Capital Management LLC is also available on the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. The searchable IARD/CRD number for Chilton Capital Management LLC is 104592.

Analyst’s Disclosure: I am/we are long GGP, SPG, MAC, SKT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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