What happened

Shares of real estate investment trust (REIT) Tanger Factory Outlet Centers (NYSE:SKT) trended lower throughout the early part of the day on May 6, eventually falling by 10% at around lunchtime. Although the factory outlet specialist was getting hit harder than its mall peers, it wasn't the only name in the mall niche seeing a notable drop. Simon Property Group (NYSE:SPG), Macerich (NYSE:MAC), and Pennsylvania REIT (NYSE:PEI) were all down by high single digits by midday.

So what

The big news in the mall space was Taubman Centers' (NYSE:TCO) earnings release, which occurred after the close of trading on May 5. Taubman is set to be acquired by Simon Property Group, so its shares are anchored to the acquisition price and didn't really make a material move on the news. Because of the pending transaction, it isn't going to hold a conference call and it didn't reveal all that much in its release, since first-quarter rents were largely collected before malls around the country were shut down because of COVID-19. Notably, Taubman made no mention of how much of its April rent roll it was able to collect or about any discussions it might be having with tenants around rent adjustments, which is the information most investors would like to know about.   

Cash registers at a clothing store with no employees or customers in the picture.

Image source: Getty Images.

That said, there was one piece of information about the impact of the COVID-19 related shutdowns and social distancing measures that could be gleaned from the report. Specifically, Taubman noted that sales per square foot in its malls were up in the January-to-February period, excluding Tesla, about 4.5% year over year. (Apparel sales were up 9% over that two-month span.) But for the full quarter, sales per square foot were down 11.6%. That shouldn't be a surprise, given that malls basically were shut for the final month of the quarter, but it shows just how painful this period has been for mall REITs. Although malls around the country are starting to reopen, the second quarter is likely to be much worse than the first for all of the REITs in this space.   

All in, Taubman reported a 15% decline in funds from operations (FFO), like earnings for an industrial company, and a 7.5% drop in adjusted FFO. Unfortunately, those are likely to look like good results when second-quarter earnings are released. As investors digest Taubman's results, they are clearly expecting equally bad, if not worse, results from peers like Tanger, Simon, and Penn REIT. Those REITs, meanwhile, aren't being taken over so they won't be able to dodge conference call questions about April and May rent collection issues.   

Now what

With J.Crew (one of Tanger's larger tenants) filing for bankruptcy over the weekend and Taubman reporting weak first quarter results, investors are again taking a dim view of mall REITs. Up and down investor sentiment is likely to be the norm here for a while as the REITs work through this difficult period. With all of these REITs set to report first-quarter results shortly, however, volatility across the niche is likely to be particularly elevated over the next couple of weeks. This area is only appropriate for risk-tolerant investors at this point.