Misleading Headlines In The Mall Space - Things Are Actually Much Better

|
Includes: BPR, CBL.PD, CBL.PE, MAC, PEI, SKT, SPG, TCO, WPG
by: Marel.
Summary

We are flooded with negative headlines about retail bankruptcies.

Negative headlines about store closures, job losses and bankruptcies are catchy. Positive stories (e.g. digital native brands going into brick-and-mortar) don't sell as much. Journalism 101: drama sells.

However, the reality is different and much brighter than the doom and gloom headlines suggest.

There is no doubt the retail landscape is changing. Promising retailers are growing, outdated concepts are dying, but malls are exposed less to legacy retail and more to lifestyle tenants.

A landlord gets to replace bad tenants with good ones. This transition causes disruption in earnings and elevated CAPEX, which the market doesn't like. However, this mentality is short-term thinking.

A few hours ago I received breaking news alerts on my phone.

Bloomberg: "Forever 21 Prepares for Potential Bankruptcy Filing"

CNBC: "Apparel retailer Forever 21 weighs bankruptcy filing"

The list goes on.

Back in June, the WSJ reported: "Forever 21 Seeks Restructuring Advice to Avoid Bankruptcy". Even though the possibility of bankruptcy surfaced in June, the fast-fashion retailer has actually been the subject of financial speculation since 2014, if not earlier.

I started reading the breaking news articles about Forever 21 and found a common theme: malls are to blame. This is in line with previous articles about other retail bankruptcies.

For example, CNBC mentions:

Many of the most troubled retailers, like Forever 21, are located in malls, where fewer shoppers are spending their money.

I will not quote similar extracts from the other articles, as the above quote is sufficient to dig deeper and prove that malls are not to blame.

Malls are experiencing the following, among other things:

  • rising traffic
  • rising sales PSF (record high levels)
  • consistently low tenant occupancy cost
  • resilient occupancy rates (close to historical high levels)
  • positive releasing spreads
  • transformation into mixed-use, lifestyle-oriented centers (less focus on legacy/apparel retail)

Rising Traffic

Thasos mall REIT foot traffic Surprised? Mall traffic is at a multi-year high.

The Thasos Mall REIT Foot Traffic Index displays year-on-year changes for customer visitation, derived from mobile phone location data. Thasos notes:

"Even with the Easter shift this year, we observe promising growth in visitation to enclosed shopping malls recently."

Note when the above index has dips (and it always will), expect headlines such as the following: "Offering shoppers new experiences isn’t helping as malls see tsunami of store closures, falling traffic" - this was from CNBC earlier this year. This statement is not correct. Besides the Thasos Mall REIT Foot Traffic Index, lets take PREIT (PEI) as a case study.

PREIT's remerchandising and tenant diversification efforts have produced results with sales and traffic growth being reported at properties that have already received remerchandising treatment. Examples include:

  • At Capital City Mall, PREIT replaced Sears with DICK's Sporting Goods, PA Fine Wine and Premium Spirits and Primanti Bros. as well as added the only Dave & Buster's in the region. Comparable sales are up 8.2% compared to before the development started and traffic is up 9.4% on a YTD basis.
  • At Mall at Prince Georges, PREIT overhauled the inline tenant mix to bring in an assortment better aligned with the customer base. New tenants include: DSW, ULTA, Chipotle, Five Guys, & Pizza, H&M and Express Factory. Comparable sales are up more than 23% and NOI is up more than 20%.
  • At Moorestown Mall, rent generated in the former Macy's store is 19 times the prior revenue and traffic has improved by 5.7% through June 30, 2019 compared to the first six months of 2018.

Note, the above PREIT case study applies to all other listed mall REIT names.

Rising sales PSF

sales PSF MAC The above graph demonstrates a clear trend and record high sales PSF. I will not bore you with graphs from other companies, but will highlight that even the heavily beaten down names such Washington Prime (WPG) are reporting rising sales PSF (WPG sales PSF increased to $410 versus $397 for the same period last year).

This means that tenants are selling and shoppers are spending significant amounts in malls.

Resilient occupancy rates

The following graph is for Tanger (SKT). Empty mall? I don't think so!

SKT The following graph is for Macerich (MAC). Empty mall? I don't think so!

MAC occupancy

The following graph is for Taubman Centers (TCO). Empty mall? I don't think so!

TCO occupancy

I will not bore you with more graphs in general as they show the same thing.

Simon Property (SPG) reported occupancy of 94.4% at June 30, 2019 and positive leasing spreads PSF of 32.3% (I expect this figure to normalize at lower double digit levels). TCO, MAC, PEI, etc posted positive leasing spreads as well. The list goes on...

Malls are less exposed to legacy retail than most people think

One final note is important. In the past, malls used to be pure shopping destinations, predominantly focusing on apparel/fashion retail. Today, malls are morphing into hybrid mixed-use town centers (much of this transformation has already started), with a diverse tenant mix focusing more on service, entertainment, dining, fitness, etc. 'Dying' retailers are constantly being replaced with thriving retailers, and therefore malls are become more resilient and diversified. Today, the tenant mix includes:

  • Restaurants, bars, cafes
  • Grocers/supermarkets
  • value retail (think Five Below)
  • cinemas, live shows, etc
  • bowling, minigolf
  • spas, beauty salons, barber shops
  • escape rooms
  • phone repair shops
  • gyms/fitness centers
  • sports (think soccer 5-a-side, basketball, etc)
  • libraries
  • coworking (think WeWork)
  • Amazon Lockers
  • self-storage
  • casinos

The list goes on...

What's more, mall REITs are also focusing on densification initiatives (multifamily, hotels, etc). For example, they are transforming unproductive land, parking lots and vacant boxes into flats and hotels. These initiatives are expected to further boost traffic.

Conclusion

In short, if Forever 21 vacates some malls, that is not the end of the world. It is no doubt an inconvenience but nothing more than a short term hiccup. The vacant space will be eventually be released, in many instances at higher rates. However, it is very unlikely that Forever 21 closes down all stores in Chapter 11. Forever 21 will most likely seek to reduce debt and exit leases in unprofitable locations. Many of the profitable stores are situated in thriving malls which belong to the publicly listed REITs (the names discussed above) and not private hands. Forever 21 is not a dying company like Bon Ton and Sears.

In closing, here is a nice table showing some of the positive trends in the space that the mainstream media does not focus on a lot. Clicks-to-bricks retailers are becoming an increasingly large component of malls. For example, the following clicks-to-bricks retailers are part of MAC's portfolio.

MAC clicks-to-bricks

Investing in a mall REIT today means investing in mixed-use urban real estate. Be wary of generalizations and negative headlines in the media. The reality is different than the doom and gloom headlines. This is evidenced by healthy operating metrics and traffic trends as outlined in this article.

Disclosure: I am/we are long PEI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long MAC, SPG, TCO, BPR, WPG, WPG-I/WPG-H, CBL-D/CBL-E/