Real estate investments trusts (REITs) that own top-tiers malls have managed to weather the so-called retail apocalypse. In a broad sense, the top REITs that own mall space have reported that rents and occupancy rates are up. This has occurred because these companies -- Simon (SPG +0.63%), Brookfield (BPY +0.00%), and Taubman (TCO +0.00%) -- have been creative in filling spaces with non-traditional mall options, including coworking spaces, gyms, and hotels.
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This video was recorded on June 18, 2019.
Shannon Jones: We can't talk about malls without really diving into the mall owners. Of course, majority of malls are REITs, basically. We've got about 1,000 malls in the U.S. 70% are owned by these REITs. I mentioned the retail boom that happened in the 90s and 2000s, and since the recession haven't really seen a similar boom. It's interesting that the U.S., though, still has more retail square footage than any other country in the world right now. When you combine that with these store closures, these bankruptcies that are happening, you've got a lot more vacated space. That's really impacted a lot of these mall REITs. Which ones, though, stand out to you as interesting, maybe even potential investments, Dan?
Dan Kline: The mall company I'll point out is Simon. The upscale mall here in Palm Beach Gardens is a Simon mall. That mall has done well. When a store closes, something else goes in. It's one of those malls you walk around, and you think, "Who shops here?" There's a Rolex store, and, I don't know if they have a Tesla store, but it's like that level of, "OK, all I can afford in this mall is the food court and maybe the Godiva. There's nothing I can buy." But those malls, and Simon as a company, has seen their dollar per square foot go up 3.1% over last year. They've also seen their occupancy rate go up. Again, that's not because they found new ways to get a new Sears to open. We both know that's not happening. They're being creative. They're putting in things like co-working spaces, or Eataly food halls, or more restaurants.
The companies that own the top-tier malls, those are doing well. We saw similar things with Brookfield and [...] two mall companies. In general, the results are good, sales are up. But that's not the sales we thought of. Yeah, there's a few chains. Ulta Beauty is expanding quickly. Ross is expanding, not necessarily a mall store. A lot of the vacancies we're seeing are more strip malls. Whereas the successful malls have appeal. They can say to people, "Look, do you want to be next to the Kmart that's dying? Or do you want to be in the mall that replaced Sears with a trampoline park and now we have an ice skating rink and we're putting in a swimming pool," or who knows what else it is? It's really about the rich getting richer. We're going to see a lot of fully vacant strip clauses consolidate and get steamrolled and turned into something else.
Jones: Yeah. Really, where you're seeing this trend go, Dan, is premium mall opportunities. REITs that are focusing on premium brands, premium stores. I think what you see happening in the entire mall REIT space is, they are trying to make concessions to keep as many of these stores there, just to keep their occupancy rates relatively high. I think most of them are trending around 94%, if not higher. But 99% is what we saw just a few short years ago. Overall, the mall REIT section is, I think, an interesting investment opportunity, one, just because a lot of the fear mongering that's going on with the death of retail, I don't think malls are going to go anywhere anytime soon. I do think it is about adapting and figuring out which strategy they can employ to drive foot traffic. But I don't see them going out. Would you say that now might actually be a really good time to buy some of these mall REITs? Especially with yields 5-8% higher.
Kline: I think it is. The reality is, it's harder to get Americans to leave their house. If you can buy most things on Amazon, you're not going to make a quick trip to the grocery store for something you need for three days from now. If I take a good mall, and it not only has a movie theater, a giant eating hall, maybe I can get my oil changed, who knows what, they're giving me a pile of reasons to visit. That's going to be very attractive for stores. Right now, the one advantage you have if you're UNTUCKit or Warby Parker is you have leverage over a mall. You can go to the mall and say, "I'm not signing a 10-year lease. I'm signing a one-year lease with a bunch of options. I want these guarantees. I'm not going to give you this cut of my Christmas sales." There's a lot more leverage for those retailers that bring cachet to negotiate with the malls. The malls are going to figure out ways to either get rid of space, or replace that space with other things. Starbucks will pay a comparable rate to another coffee shop. A mall can arguably charge Dave & Buster's less for the attraction of Dave & Buster's and have it be a benefit and help them get in some other stores.
So, yeah, cautiously, I would look at these REITs as possible buys if you, like me, believe that people will still leave the house, they are still going to go to the mall. I don't think teenagers are as driven to the mall as they used to be, but they still want to go there. The things we liked -- my son still wants a pretzel or a gelato or whatever it might be, and those things are at the mall.
Jones: All right, Dan, always a pleasure to have you on the show! Be sure to stay out of the American Girl store. Continue propping up J.C. Penney.
Kline: [laughs] I don't think we have an American Girl store here.
Jones: [laughs] Not yet, and thank goodness!
