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Which Mall REITs Are Best Positioned for the Future?


Apr 21, 2020 by Matthew DiLallo

Malls in America are struggling. Many retailers have been shuttering locations -- or closing up shop altogether -- in recent years due to sagging sales as more consumers do their shopping online. Those factors have impacted occupancy at regional malls, cutting into their cash flow. As a result, this subsector of the retail REIT marketplace was the worst-performing in the industry last year, with a negative total return of 9.1%.

Unfortunately, things have gone from bad to worse for regional mall REITs in 2020. The retail landscape has truly become like something out of the apocalypse as the COVID-19 outbreak has forced many nonessential retailers to close their doors to help slow the spread. Many may never reopen. That has put even more pressure on the shares of mall REITs, which are down nearly 60% on average this year.

However, as bad as all that sounds, several mall REITs are repositioning their properties for the future. These investments have the potential to create value for their investors in the coming years.

Making a bold bet on transforming malls

Brookfield Property (NASDAQ: BPY) (NASDAQ: BPR) operates a diversified global real estate portfolio, which includes office, retail, multifamily, and other property types. The company built a sizable retail empire by acquiring a stake in mall owner GGP during the financial crisis and subsequently purchased the rest of the company in 2018. One reason Brookfield wanted to control those mall assets was so that it could leverage its real estate expertise across multiple sectors to transform or reposition the shopping centers for the future.

Brookfield is investing more than $500 million into redeveloping several properties and has another $500 million or more of opportunities on the planning board. Its current redevelopment investments include turning former department stores into theaters, entertainment areas, and residential units. Meanwhile, some of its planned developments include eat-and-play formats, residential towers, and a hotel. Brookfield believes these investments into reimagining many of its malls will help drive healthy earnings growth in the coming years as these developments stabilize.

Enhancing its portfolio

Simon Property Group (NYSE: SPG) also firmly believes that malls have a bright future. It has invested $8 billion over the last eight years as part of its vision to create mixed-used destinations where people can live, work, play, stay, and shop. It plans to pour another $5 billion into this vision over the next five years to create more than 4,500 residential units, over 1,500 hotel rooms, and more than 1 million square feet of commercial office space. Many of these projects feature the development of state-of-the-art residential opportunities with ultra-modern office and commercial spaces.

Simon sees the potential for extending this program beyond its existing portfolio. That led it to sign a deal to acquire fellow mall owners Taubman Centers (NYSE: TCO) for $3.7 billion, adding 26 regional malls to its portfolio. In joining forces, the combined company will be in a better position to "invest in innovative retail environments that create exciting shopping and entertainment experiences for consumers [and] immersive opportunities for retailers," according to comments by David Simon, the CEO of Simon Property Group.

Converting malls to town centers

Macerich (NYSE: MAC) has also been adapting its malls to the changing retail environment. The company is redeveloping locations to convert them from traditional regional malls to town centers. These reimagined properties incorporate many nontraditional tenants like coworking sites, hospitality and multifamily developments, and experiential places like eat-and-play concepts and museums.

The company's redevelopment initiatives, however, have been harder hit by COVID-19 because it doesn't have the balance sheet strength of Simon or the financial resources of Brookfield due to its relationship with Brookfield Asset Management (NYSE: BAM). Because of that, Macerich has dramatically reduced capital spending, including the size and pace of its redevelopment opportunities. While that could cause it to fall behind financially stronger rivals like Brookfield and Simon, it does own premier properties that should thrive as mixed-use town centers as it completes future redevelopments.

Turning malls into more than a place to shop

Several of the country's top mall owners are investing billions of dollars in transforming their real estate from retail centers to multi-use properties. They're converting former anchor stores and outparcels into eat-and-play locations, residential units, hotels, and office space, which will provide a steadier stream of traffic to new and existing retailers. These moves should enable smart mall operators to improve the occupancy and profitability of their locations.

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Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Property Partners. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.

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