Shares of high-end enclosed mall real estate investment trust (REIT) Macerich (NYSE:MAC) jumped 10% in the first hour or so of trading on April 27. It was accompanied by big gains for Pennsylvania REIT (NYSE:PEI), Tanger Factory Outlet Centers (NYSE:SKT), and Simon Property Group (NYSE:SPG), among other peers. Thus, the story wasn't really specific to Macerich -- it was the entire mall space that investors were pushing higher.
Malls have suffered this year because of the social distancing requirements put in place to slow the spread of COVID-19. The big hit was when non-essential stores were ordered to shut across large portions of the United States. Malls were, effectively, closed down. The retailers in the malls, meanwhile, have been attempting to stay afloat as best they can without open retail locations. That's included cutting costs, laying off employees, and, in some cases, either refusing to pay rent or asking for rent concessions.
Malls make their money by charging tenants rent, so that last point is a big issue. So big, in fact, that mall REITs, many of which have been reliable dividend payers for a very long time, have been trimming their shareholder disbursements. Macerich, for example, cut its dividend in March by 33% after 10 years worth of annual increases. Furthermore, the now $0.50-per-share quarterly dividend will be paid with a mixture of cash ($0.10 per share) and stock (the rest).
The mall sector is facing very big problems today that are likely to linger even after social distancing measures begin to lift. For example, the efforts to slow COVID-19 are likely to result in a recession, which will depress consumer buying. Lingering fears over the coronavirus could lead to weak mall traffic, further compounding the pain. Moreover, stressed mall retailers could close stores or go bankrupt, putting pressure on occupancy and rental rates. And malls will also be spending more on maintenance to reassure customers that their facilities are safe and clean, upping their ongoing costs.
But, investors are a fickle lot. With news that some states are starting to reopen non-essential businesses, Wall Street got excited that the worst may be over for mall REITs. Thus, Macerich, and many of its peers, shot higher. These remain very volatile times for mall REITs, so any gains could be just as easily lost on dour COVID-19 related news. Moreover, with earnings season only just starting, the real impact from COVID-19 on mall REIT finances still isn't clear, though it will clearly be bad. In other words, long-term investors shouldn't put too much trust in this bit of enthusiasm.
Most investors should think twice about buying a mall REIT today. Yes, their stock prices have fallen dramatically, but there's a very good reason for the decline. Moreover, there's no really clear indication yet of what the future holds for any of the mall REITs. Industry leaders like Macerich, with a strong portfolio of high-end properties, are likely to survive. But there's going to be a lot of volatility in the near term to deal with. If you can't handle the ups and downs, Macerich and its peers are not appropriate for your portfolio.