Outlet-focused mall real estate investment trust (REIT) Tanger Factory Outlet Centers (NYSE:SKT) fell about 10% within the first hour of trading on May 13. However, enclosed-mall peers Macerich (NYSE:MAC), Simon Property Group (NYSE:SPG), and Pennsylvania REIT (NYSE:PEI) weren't far behind, each dropping by about 10% (rounding up in a couple of cases) for the day by around 11:30 a.m. Wall Street time. With three of the four names here having reported earnings at this point, investors are still trying to get a read on what they've learned and what it means for the future.
The first quarter really wasn't terrible for the mall REIT niche, since the government's efforts to contain COVID-19 didn't take effect until the latter half of the three-month span. Essentially, the REITs didn't have to close their malls (because they were deemed nonessential) until much of the rent for the first quarter had been collected. Yes, the closures led to weak results, but the real news investors wanted was about April rent collections. That would provide some idea of how bad the second quarter, and beyond, would look.
Tanger's update on that score was terrible, as it collected only 12% of its rents. Neither Simon nor Macerich provided rent collection updates. The sales-per-square-foot figures they released for the first quarter, however, suggested that being closed was having a big impact on their tenants. Basically, if you exclude March, when malls were shut, sales looked much, much better. Although that's not surprising, it's a bad omen for mall owners, which rely on their tenants to pay rent. If sales remain weak, Tanger, Macerich, Simon, and Penn REIT may have a hard time collecting the rents they expect even as the economy starts to reopen.
The news only gets worse from there. Several governments around the world have had to revitalize COVID-19 containment efforts after starting to reopen their economies again. Key players in the U.S. containment effort have been warning about moving too quickly. And the Federal Reserve has been warning that the government may need to step in even more than it already has to prop up the economy. In other words, mall landlords could see things get much worse before they start to get better.
Mall REITs are not an appropriate option for most investors today. There is a huge amount of uncertainty about what the future holds. At this point the only thing that is clear is that the second quarter will be very bad. How long the pain will last is the real question, though, because the sector could be headed for a lengthy downturn. No wonder investors have been selling their shares.