It’s Memorial Day, and while many people will use this time to head to the beach and soak up the first bit of summer-esque sun, it’s also a time when many will go to the mall or an outlet center shopping for swimsuits and other summer gear.
In fact, for a lot of people right here in my hometown (in South Carolina), the mall is a Memorial Day destination when it’s so hot outside – approaching 100 degrees Fahrenheit – that people will do anything or go anywhere just to be indoors with some A/C.
Mall owners will certainly hope to see a surge of shoppers over the holiday weekend. At least they can offer an escape from the heat, when it’s too miserable to be outdoors.
Now, if you’ve been watching the publicly traded mall space like I have, you’d know these companies have been beaten down much thanks to the overblown idea that’s been circulated in the media that retail is dying.
There are reports out there showing traffic to malls has dropped off over the years. And that’s likely true for many malls across the country – especially the ones that their owners aren’t investing capital into to spruce up and keep them relevant, as more shopping moves online.
With this in mind, shares of CBL Associates (CBL) are down more than 75% from a year ago. And shares of Washington Prime Group (WPG) have dropped more than 35%.
We’ve seen some of the more resilient operators in the space, however, weather these times a little better. These are the companies that have been on the forefront of getting better food, entertainment and non-apparel retailers into their malls.
With retailers recently reporting earnings for the first quarter of the year, we saw just how troubled the department store sector continues to be, as companies like J.C. Penney, Nordstrom and Kohl’s underwhelmed. Then Dressbarn said it’s going out of business, closing more than 600 stores. Payless ShoeSource, Gymboree and Charlotte Russe all filed for bankruptcy this year.
While no one mall operator is going to be entirely immune from these headwinds, I would argue now is actually a great time to get into the space, if you’re investing in the right retail REITs. A few of these companies can be great bargains for investors today. I’ve got three for you, and I’ll tell you why.
3 Mall REIT Bargains to Buy
Within the mall REIT sector our favorite picks are Simon Property (SPG), Taubman Centers (TCO) Centers, and the riskier Pennsylvania REIT (PEI). We like these three REITs because we believe they are the best capitalized to continue to mitigate the retail cycle.
Simon has a fortress balance sheet that consist of over $7.5 billion of liquidity (enough to pay for its entire development backlog and shadow backlog all on its own) and is one of the few REITs that’s totally self-funding its growth.
While the company’s dividend yield is generous (4.8%), the payout ratio (72% based on AFFO) provides evidence that the dividend is very safe, especially considering that A credit rating and fortress balance sheet.
Taubman is another top-shelf pick and I’m especially fixated on the REIT’s best-in-class sales per square foot of $845 (the highest sales per square foot in the mall sector).
The company is a landlord to many of the highest quality retailers that includes high-end brands such as Dolce & Gabbana, Diesel, Restoration Hardware, Forever 21, J.Lindeberg, and Ben Sherman.
Increasing growth indicates either rent per square foot, occupancy, or both are increasing. ‘A malls’ are expected to remain the beneficiaries of incremental demand for space and have higher rent negotiating power.
Pennsylvania REIT is a higher risk play, as evidenced by the 12.2% dividend yield. However, I credit the management team for taking bold steps in the early innings, by pruning the portfolio and having the lowest exposure to Sears of all of the mal REIT peers.
With core mall sales per square foot of $510 per square foot and core mall leased space at 96.9%, the company said on the latest earnings call that it has “transitioned to an A-mall company,” suggesting that it has leased up all of its vacant department stores. PREIT’s CEO, Joe Coradino, explained:
“We don’t anticipate any J.C. Penney closings. We have among the lowest Sears exposure in the sector. We also have two of Macy’s in the top 50 growth stores which is no small feat for a portfolio of our size. We have changed the definition of the mall and we’re agile enough to stay at the forefront of this evolving landscape.”
I happen to own all three of these mall REITs and while I can’t guarantee you they will generate outsized returns, they all appear to be well-positioned to grow earnings as the retail cycle continues to evolve. To protect the downside, we recommend maintaining adequate diversification and possibly hedging the retail exposure with technology-based sectors such as data centers and cell towers. Have a great Memorial Day and happy SWAN (stands for sleep well at night) investing!
I own shares in SPG, TCO, and PEI.