What happened

Shares of mall landlord Macerich (NYSE:MAC) jumped as much as 10% in the early minutes of trading on Wednesday, April 29. Pennsylvania REIT (NYSE:PEI) took a little longer to get started, but by 10 a.m., it too was up more than 10%. Although other mall real estate investment trusts (REITs) also saw gains, they didn't rise quite as much as this pair. That said, Simon Property Group (NYSE:SPG) gained nearly as much as Macerich, which makes complete sense.

So what

The big problem for the enclosed malls and factory outlet centers that Macerich and Simon own is pretty simple: They have been shut down because of COVID-19-related social distancing mandates. That's led many tenants to push back on rent, with some even refusing to pay. REITs have their own bills to deal with, so collecting less than their full rent rolls could quickly become a problem. Heavily leveraged Macerich, for example, swiftly trimmed its dividend by 33% (most of it to be paid in stock) to preserve cash. Penn REIT, which doesn't have as strong a portfolio of assets and is even more heavily leveraged, took its dividend down to a token $0.02 per share per quarter (a 90% cut).

Two people looking at a computer with a stock graph on the screen.

Image source: Getty Images.

However, over the last week or so, a handful of states have either begun allowing nonessential businesses to reopen or have started to discuss plans for eventual reopening. Simon, the largest name in the mall REIT sector, has taken the lead. According to a CNBC report, it intends to reopen 49 malls in 10 states where limits on social distancing are being eased. The entire mall sector will be watching what Simon does, but it has notable implications for Macerich. That's because the two landlords have similarly high-end-focused portfolios. If Simon is taking initial steps to reopen, Macerich probably won't be far behind. And the sooner it opens, the more likely it is to muddle through this difficult period.

That's doubly true for Penn REIT, which is struggling to deal with an even more heavily leveraged balance sheet. Although its malls aren't quite as well situated as Macerich's or Simon's, getting the doors open again could mean the difference between severe financial pain and survival. Although that might sound like hyperbole, Penn's financial debt-to-equity ratio of roughly 4.3 times (at the end of 2019) was more than three times larger than Macerich's 1.3 times and around 8 times that of Simon, which leads the sector with a ratio of just 0.5 times.

MAC Financial Debt to Equity (Quarterly) Chart

MAC Financial Debt to Equity (Quarterly) data by YCharts.

It's notable that Tanger Factory Outlet Centers (NYSE:SKT) and Taubman Centers (NYSE:TCO) didn't join in the early-day rally. Because of its strict focus on outlets, Tanger's outlook isn't the same as REITs with enclosed malls. It may take some company-specific updates from the REIT to get investors excited again.

Taubman, meanwhile, has agreed to be acquired by Simon. Since that all-cash deal still appears to be progressing, the future is inherently limited here. With Taubman stock currently trading around $45 per share and the deal price set at $52.50, investors shouldn't expect much upside here. In fact, based on the uncertainty in the mall space today, the discount from the deal price looks reasonable. Until it is consummated, there is always a risk that Simon could call off the acquisition.

Now what

The reopening of malls is, unfortunately, just the first step of the process. Each retailer within a mall will have to make its own call on whether to reopen. And customers still might not show up, given that the United States is likely to fall into a recession in short order, and fears about COVID-19 remain top of mind for many. So it is too early to decide if Macerich, Simon, Penn REIT, or any of the other mall landlords will see a quick return to something resembling normal operations. That said, the future is clearly starting to look much brighter, and investors are taking note. At the very least, it looks like tenants refusing to pay rent because the malls aren't open won't be able to use that as an excuse for much longer.