Mall REITs: Only The Strong Shall Survive


  • Despite reporting record-low occupancy rates and rental rate spreads, mall REITs have been the best-performing property sector this year, riding the vaccine-driven reopening rotation to gains of more than 40%.
  • "A traumatic time for our company." Reflecting on an epic plunge in operating performance over the past year, Simon Property's CEO sounded humbled when discussing recent performance and its outlook.
  • While rent collection rates have improved to around 90%, Q1 results showed that vacancy rates continued to climb. Simon is the lone mall REIT projecting positive FFO growth this year.
  • From SPARC to SPAC. Desperate times call for desperate measures, and we've been encouraged to see some "fight" and creativity from Simon, which sponsored a SPAC and continues to buy distressed retail brands.
  • Dismal earnings reports from mall REITs came despite the strongest year for retail sales in history. Outside of Simon, the remainder of the mall sector remains in a fight for survival with an uncertain future.
  • This idea was discussed in more depth with members of my private investing community, The REIT Forum. Learn More »
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REIT Rankings: Mall REITs

mall REITs

(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)

Mall REIT Sector Overview

Mall REITs have been the best-performing property sector this year, riding the vaccine-driven reopening rotation to gains of over 40% even as earnings results indicate ongoing distress. Within the Hoya Capital Mall REIT Index, we track the seven mall REITs, which account for roughly $45 billion in market value: Simon Property (SPG), Macerich (MAC), Tanger Factory Outlet (SKT), Washington Prime Group (WPG), Pennsylvania REIT (PEI), and CBL & Associates (CBL), as well as one diversified REIT, Brookfield Property (BPYU), which owns a portfolio comprised of roughly 50% malls.

mall REITs

Before the pandemic, we warned that several mall REITs were "one recession away from extinction." Since then, two mall REITs - CBL and PEI - indeed entered Chapter 11 bankruptcy proceedings last year and a third - WPG - is teetering on the edge after extending its forbearance agreement with noteholders for a sixth time this week amid "substantial doubt" about its ability to continue as a going concern. Earnings reports revealed that Q1 was another epically bad quarter, particularly for the lower-productivity mall REITs. Occupancy rates declined to fresh record-lows with another 90 basis point decline in Q1 which was 370 basis points from last year to below 90%.

occupancy rates 2021

Mall REITs are looking to regain their footing after reporting historic plunges in Funds From Operations ("FFO") and Net Operating Income ("NOI") in 2020. Post-pandemic economic reopening and improving rent collection rates have given investors some reason for optimism recently as the sector reported collection rates improving to 90% in Q1, up from the lows last year around 50%. SPG reported that it collected over 95% of net billed rents with in-line tenant collections back to pre-COVID levels. Lower-productivity mall REITs, however, haven't yet cracked the 90% rent collection rate.

mall REITs rents

Even when assuming a return to 100% rent collection levels, leasing spreads - perhaps the best leading indicator of NOI growth - continue to point to declining growth for the foreseeable future. Leasing spreads averaged -12.2% for the low-tier malls while high-productivity REITs reported a -9.2% decline, the worst quarter on record. Tanger Outlets, meanwhile, reported a -8.5% dip in leasing spreads, a mild sequential improvement from the past two quarters. Simon defended the declines, pointing out that they've been accepting lower base rents on renewals in exchange for higher percentage rents which pay more if tenant sales exceed certain breakpoints.

mall leasing spreads

The combination of lower rental rates, lower occupancy rates, and missed rents resulted in a same-store NOI decline of 17.6% in Q1 on average - by far the worst in the REIT sector - a surprisingly modest recovery considering the improvement in reported rent collection rates. While the middle and higher-productivity mall REITs generally managed to keep their heads above water throughout much of the retail apocalypse, the water is clearly getting increasingly more treacherous for all but the absolutely highest quality malls and we continue to see insurmountable challenges for Class B and C malls.

mall REIT performance

Outside of Simon - the lone mall REIT that expects positive FFO growth this year - the mall sector remains in a fight for survival with an uncertain future. Simon reported a solid sequential improvement in NOI growth and boosted its full-year guidance which now calls for growth of 7.0%. Despite the rebound this year, SPG noted that it won't get back to 2019 levels until "more towards '22 or '23." Macerich affirmed its previously-reduced guidance calling for a FFO decline of another 13.4% in 2021 following the 39% plunge last year while Tanger affirmed its outlook for another -5.7% FFO decline. The three lower-productivity mall REITs have seen more muted improvements in NOI growth in recent quarters and - while not providing guidance - are likely poised for another year of sharp FFO declines.

mall REIT ffo growth

Mall REIT Stock Performance

Despite reporting record-low leasing spreads and occupancy rates, mall REITs have been the best-performing property sector this year, riding the vaccine-driven reopening rotation to gains of 42.9%. More than doubling from their lows last year and pushing the share prices and FFO per share valuations of several mall REITs back to pre-pandemic levels despite an outlook that is far bleaker than before, mall REITs have significantly outpaced the 14.1% gain on the Vanguard Real Estate ETF (VNQ) and the 9.9% gain on the SPDR S&P 500 Trust ETF (SPY).

mall REIT performanceCould 2021 be the year that mall REITs snap their unprecedented streak of underperformance? Mall REITs - a perennial favorite of deep value investors - have underperformed the REIT sector average in each of the last five years and have not recorded a year of positive total returns since 2015. Amazingly, no other REIT sector has seen more than 2 consecutive years with negative total returns since the end of the last recession. Since 2015, mall REITs have produced an annualized average total return of -10.6%, the worst among major property sectors during this time.

mall REIT performance

All eight mall REITs recorded double-digit declines in 2020, but six of the eight are higher by at least 20% this year. PREIT has led the gains after emerging from bankruptcy in late 2020 but - despite doubling this year - has still lost 90% of its value over the past five years. CBL Property's 100% gains this year - rising from $0.05 to $0.10 per share - also need to be taken with a grain of salt. Absent the 9-for-1 stock split from Washington Prime late last year, WPG would also be a "penny stock" as well after the 70% declines this year.

mall REIT performance 2021

Deeper Dive: Retail Fundamentals

The dismal earnings reports from mall REITs over the last several quarters, interestingly, come despite the strongest year for retail sales in history. Aided by WWII levels of fiscal stimulus, retail sales surged to all-time record highs in early 2021. Sales in April were 51% above 2020 levels and 21% above pre-pandemic levels in 2019. Online sales have led the charge, but non-mall-based brick and mortar categories including Grocery Stores and Building Materials retailers have also performed well throughout the pandemic. The recent recovery in traditionally mall-based categories including clothing, department store, and electronics comes after sharp declines in 2020.

retail sales 2021

Despite the retail sales rebound, the past year has seen a flurry of bankruptcy filings from dozens of mall-based retailers including J. Crew, Neiman Marcus, Ascena Retail Group, Tailored Brands, and Modell's, among others. While several of these retailers have since emerged from bankruptcy, they do so with significantly smaller footprints. The pace of store closings increased substantially in 2020, and following a similar pattern as 2019, the market share loss hit the traditionally mall-based retail categories especially hard, the majority of which fall into the dreaded "non-essential" category and those that have struggled to adapt to the increasingly digital retail landscape.

e-commerce market share

As if the retail apocalypse and coronavirus pandemic weren't big enough concerns for the enclosed mall format, these headwinds have been magnified by the sky-high leverage levels of many of these mall REITs. Simon is the only mall REIT with a decent balance sheet which includes one of the few coveted A-ratings from S&P on its long-term debt. Four mall REITs currently have debt ratios above 85% including Macerich, which finds itself struggling to stay above water despite its relatively high-quality portfolio. In our recent report "Cheap REITs Stay Cheap," we discussed our study that showed that REITs with lower leverage have historically produced better total returns, on average, than their higher-levered counterparts.

mall REIT balance sheets

Mall REITs Fight For Survival

Desperate times call for desperate measures, and we've been encouraged to see some "fight" from sector stalwart Simon Property, which has made a series of investments into distressed retail brands, most of which through SPARC Group, a 50-50 partnership between Simon and Authentic Brands. This month, SPG added Eddie Bauer to its portfolio of brands which includes Brooks Brothers, Lucky Brand, Forever 21, J.C. Penney. A strategy that does have successful precedent - notably the acquisition of Aeropostale in 2016 - the investments will keep many storefronts open, at least for now. Even so, retail research firm Coresight Research reported that roughly 9,000 stores closed in 2020 and estimates that as many as 10,000 could close this year - primarily in the mall-based category - the most on record.

store closings 2020

Below, we outlined the strategies that successful brick-and-mortar retailers have utilized to compete, which we call the "4 Critical Cs of Brick & Mortar Competition." While we are skeptical that the lower-productivity enclosed mall format can remain viable over the next decade, we do believe that well-located high-productivity suburban malls that have the critical mass and "network effects" to offer a value-added retail experience can remain relevant.

retail competitive advantage

From SPARCs to SPACs. SPAC Mania swept the REIT sector in early 2021 with a half-dozen REITs now involved with Special Purpose Acquisition Vehicles ("SPAC"), also known as "blank check companies." In February, Simon launched Simon Property Group Acquisition (SPGS) with a target value of $300 million and is seeking to "target a company or assets with significant growth potential in an industry that will "benefit from the experience, expertise, and operating skills of the management team and SPG." Presumably, the SPAC - of which SPG retains 20% ownership in - may ultimately be the landing spot for a spin-off of SPARC Group.


The M&A "animal spirits" have swept the REIT space as well in early 2021. In April, Brookfield Asset Management (BAM) finalized a deal with Brookfield Property Partners (BPY) - and by extension Brookfield Property REIT - to acquire all of the limited partnership units of BPY and BPYU that it doesn't already own for $18.17 per unit, representing a total consideration of $6.5B. The offer represented an increase of 10%, including the appreciation of BAM class A shares, over the non-binding proposal made by BAM on Jan. 4, 2021, a 26% premium to BPY's unit price on Dec. 31, 2020 and a 6% premium to the average price of BPY units since the announcement was made on Jan. 4.


Mall REIT Dividend Yields

For the handful of larger REITs that have continued to pay their dividend, mall REITs have become one of the higher-yielding REIT sectors, but not necessarily for the right reasons. Helped by the large weighting to Simon Property Group, mall REITs pay a weighted average dividend yield of 4.1%, which is well above the REIT sector cap-weighted average of 3.1% but have achieved muted or negative dividend growth over the past five years.

mall REIT dividendsFive mall REITs - SKT, WPG, CBL, PEI - completely eliminated their dividend last year while two others - SPG and MAC - reduced their dividend. As part of the BPY acquisition by Brookfield Asset Management, BPY unitholders and holders of BPYU will not receive further quarterly distributions on their securities. SKT - which was formerly a so-called "dividend aristocrat" - did resume its dividend earlier this year, but at levels that are well below its pre-pandemic rate. We continue to believe that mall REITs will be among the last to resume or increase their dividend above pre-pandemic rates given the precarious debt situation faced by all of these REITs.

mall REITs yield

Interestingly, the preferred securities offered by these mall REITs haven't been much safer for investors over the last year. Six of the eight mall REITs offer preferred securities, including one issue from Simon Property (SPG.PJ), one from Seritage Growth (SRG.PA), two from Washington Prime Group (WPG.PH, WPG.PI), three from Pennsylvania Real Estate Investment Trust (PEI.PB, PEI.PC, PEI.PD), two from CBL & Associates Properties (CBL.PD, CBL.PE), and four from Brookfield Property REIT (BPYUP, BPYPP, BPYPO, BPYPN). The preferred securities from CBL and PEI have been suspended since early last year while WPG suspended its preferred stock dividends earlier this year.

mall REIT preferreds bonds

Mall REIT Valuations

Mall REITs trade at some of the lowest valuations across the REIT sector, but while value-oriented and yield-seeking investors may be attracted to these REITs, we caution that the "deep value" strategy hasn't been particularly rewarding to REIT investors over the past decade. Mall REITs trade at a Price-to-FFO ("Funds from Operations") multiple of roughly 11.7x, which is below the REIT sector average of 21.1x. The sector now trades at a roughly 15% discount to Net Asset Value, though the "true" NAV discount may be far lower given the recent lack of private market buyers for enclosed mall properties.

mall REIT valuations

Key Takeaways: Fighting For Survival

"It's been a traumatic time for this company," noted the ever-candid CEO David Simon after Simon Property Group's first quarter results. If "trauma" describes SPG's results - the lone mall REIT that sees positive growth this year - words may not be able to describe the struggles of the rest of the sector which is likely to be hollowed-out over the coming quarters. The forthcoming post-pandemic "suburban revival" does offer a glimmer of hope for the higher-productivity malls, but we believe that investors should be wary of jumping into a perennial "value trap" until fundamentals clearly stabilize.

mall same-store NOI growth

Before the pandemic, we warned the much of the mall REIT sector was "one recession away from bankruptcy." Since then, two REITs have entered Chapter 11 and a third teeters on the edge. The vaccine-driven rotation has pushed share prices and FFO-based valuations of several mall REITs and other distressed REITs back to pre-pandemic levels despite a far bleaker fundamental outlook. For investors looking to play the vaccine-driven rebound through retail exposure, we see a more promising long-term outlook for the Shopping Center and Net Lease REIT sectors and continue to see the best value in the "essential" property sectors including housing and technology.

REIT sector returnsFor an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Cannabis, Real Estate Crowdfunding, High-Yield ETFs & CEFs, REIT Preferreds.

Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Index definitions and a complete list of holdings are available on our website.homebuilder etf

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