The spread of the coronavirus around the world has upended the global economy. Efforts to control the virus have centered around social distancing, which is terrible news for real estate investment trusts (REITs) that own malls -- places specifically built so people can congregate. Malls were already getting hit by the consumer shift toward online shopping, so it only took a few weeks of social distancing to put weaker malls into distress mode.
But even the strongest mall owners are feeling the pain. Here's how bad it's getting for companies like Simon Property Group (NYSE:SPG), Macerich (NYSE:MAC), Taubman Centers (NYSE:TCO), Pennsylvania REIT (NYSE:PEI), and CBL & Associates (OTC:CBL).
Forced to shut the doors
Malls are purpose-built to bring shoppers together in one central location, and the ease with which COVID-19 can spread has turned that into an incredibly negative attribute today. Now add in the fact that most of the retailers inside the properties that mall real estate investment trusts own are selling discretionary products (like fancy clothing and jewelry). It's little wonder that malls were shut down when governments around the country (and world) started to close non-essential businesses.
On the surface, that's not such a bad thing for the mall REITs if their tenants keep paying rent. But retailers are under tremendous financial strain too, and many have either asked for rent concessions or have outright declined to pay. There's a certain logic to this decision: If the mall isn't open for business, why should a retailer have to pay rent? However, mall REITs have their own bills to pay. That includes the salaries of staff, interest expenses on debt, and mortgage payments. If they don't collect enough of the rent roll to cover their costs, things get ugly very quickly.
And that's exactly what has happened. As you might expect, however, the most highly leveraged companies are the ones that are feeling the most distress. Mall owners with less desirable properties are getting hit even harder. For example, CBL, with one of the weakest balance sheets and a portfolio of malls with industry-lagging average sales per square foot, had to cut its dividend to zero even before the COVID-19 shutdowns. Now Bloomberg is reporting that the REIT has engaged advisors to help it with a restructuring effort (read: bankruptcy).
What else is going on?
CBL, however, isn't the only mall REIT that's retrenching. As mall owners attempt to preserve cash, they are cutting dividends left and right. Even mall REITs with great properties, like Macerich, are taking this defensive action to preserve their liquidity at a time when rents simply aren't coming in. Macerich dropped its quarterly dividend from $0.75 per share per quarter to $0.50, a 33% cut. But that's not the whole story: It only intends to pay out 20% ($0.10 per share) of the dividend in the form of cash, paying out the rest in shares. That's a letdown in some ways, but at least the company is still attempting to return value to shareholders via distributions.
Washington Prime (NYSE: WPM) first announced that it was cutting its dividend in half in mid-March. Then, roughly a month later, it took the dividend all the way to zero. Obviously things got bad fast for this landlord, and when times are tough cash is king. Penn REIT was a little kinder, "only" cutting its dividend 90% to $0.02 per share per quarter. That is obviously a token payment, and is likely only meant to appease institutional investors that can only own dividend-paying stocks.
Simon Property Group and Taubman Centers haven't slashed their payouts yet, but there's a complicating factor here. Earlier in the year, Simon agreed to buy Taubman for $52.50 a share in cash. One of the stipulations of the deal is that the Taubman family would own 20% of the malls it used to operate, which would be set up as a separate entity within Simon, and get the same old dividend. So a cut could be problematic (a lot depends on the actual acquisition agreement), and the company will probably do everything in its power to avoid the move.
Simon, meanwhile, trimmed its dividend and paid partially with stock during the 2007-to-2009 downturn. So investors should probably expect a cut. However, it has moved to raise a lot of cash to boost its liquidity. In mid-March, the REIT estimated that it had around $9.5 billion in credit facilities available to it after inking a new $6 billion facility, and that's after accounting for the acquisition of Taubman. While other REITs were doing similar things to shore up their liquidity, Simon's got a cash backstop well beyond those of any of its peers. It's not unreasonable to think that it can lean on that cash to muddle through these tough times and keep paying its dividend (which earnings are unlikely to cover for at least a quarter or two).
Signs of improvement
So things are bad in the mall REIT sector, and companies are doing just about anything they can to survive. And yet there are some green shoots appearing, with a handful of states allowing non-essential business to reopen again. Other states are also starting to discuss plans to do so. In fact, Simon, the industry bellwether, is taking the lead on this. CNBC reported that it was planning to reopen 49 malls in states where non-essential businesses are being allowed to open. Not surprisingly, mall REITs jumped on the news, and it's likely that other mall owners will quickly follow suit, perhaps even mimicking the steps Simon takes in the reopening process.
That's great, of course, but it really doesn't solve the problem. For starters, Simon opening a mall doesn't mean its tenants will reopen within the mall. So it could still face rent collection issues, though lessees won't be able to use "the mall is shut" as an excuse for not paying anymore. Then there's the issue of costs, since Simon will be stepping up its cleaning efforts and offering customers masks if they want them. That, of course, assumes that customers are willing to go to the mall at all. Fears about COVID-19 are likely to linger, and even for those who do venture out Simon will be limiting occupancy numbers. Simply put, there will not be as many shoppers. That, in turn, will hinder sales even at the best-located malls. As long as steps like these are in place, malls will remain under pressure. All in all, there's still a lot of work to be done even under a best case scenario.
It'll get worse before it gets better
Although there's been some news about a potential medical treatment for COVID-19, first-quarter earnings are still going to be terrible for mall REITs. And the second quarter could be even worse, as COVID-19 issues continue to play out around the nation and the world. Simon, with some of the best malls and the strongest financial position, should get through this in one piece, but be prepared for a dividend cut of some kind.
The other names in the space are likely to struggle even more, with CBL already showing just how bad it could get for debt-heavy REITs. Penn REIT and Washington Prime, for example, sit at the high end of the leverage spectrum, though nowhere near as high as CBL. Dividend cuts may be enough, but investors shouldn't be surprised if even more drastic efforts are needed. This is not an area where conservative investors should be playing today. However, if you do venture in, Simon looks like the most compelling option.