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Is Brookfield Property the Best Mall REIT?

Sep 27, 2020 by Matthew DiLallo

Regional malls have seen better days. Consumers used to flock to these indoor shopping centers to buy clothing and other household goods. However, an increasing number of consumers shopping online is having a massive impact on the brick-and-mortar retailers that make up the bulk of a mall's tenant base. That retail apocalypse forced many retailers to close locations, while others have gone bankrupt, turning some malls into ghost towns.

While industry conditions look bleak, Brookfield Property (NASDAQ: BPY) (NASDAQ: BPYU) sees an opportunity where others only see challenges. That led it to acquire full control of leading shopping mall owner General Growth Properties (GGP) in 2018 with an eye toward the future. Here's a look at how Brookfield now compares to its mall-owning peers.

A look at Brookfield Property's mall business

Brookfield Property is one of seven publicly traded real estate companies with large-scale portfolios of regional malls. The company's core retail portfolio includes 122 best-in-class malls and urban retail properties comprising more than 120 million square feet of retail space. Overall, the company owns 8% of the country's highest-quality retail space, with its properties generating $651 in tenant sales per square foot.

One reason Brookfield acquired GGP was to maximize the value of its real estate. It wants to transform many GGP malls into mixed-use properties that include shopping, dining, and entertainment venues, as well as other property types such as hotels, apartment homes, and office space. These destination properties would draw in crowds while also benefiting from a captive audience of those who live, work, or stay on location.

How Brookfield Property's mall portfolio compares to its peers

Two major factors investors need to consider when analyzing mall real estate investment trusts (REITs) are portfolio quality and balance sheet strength. Here's how Brookfield stacks up with its peers.

Brookfield Property owns one of the largest mall portfolios among its publicly traded peers:

Mall REIT Properties Square Feet, in Millions
Simon Property Group (NYSE: SPG) 235 191
Brookfield Property 122 120
CBL Properties (NYSE: CBL) 108 68
Washington Prime Group (NYSE: WPG) 100 53
Macerich (NYSE: MAC) 47 51
Taubman Centers (NYSE: TCO) 26 25

Data source: Brookfield Property, CBL Properties, Macerich, PREIT, Simon Property Group, Taubman Centers, and Washington Prime Group.

As this chart shows, the company has the second-largest mall portfolio in its peer group. While it's a large-scale portfolio of high-quality retail properties, Brookfield's malls trail a few of its peers in some key operating statistics.

For example, Simon's malls generated an average of $673 in sales per square foot before the COVID-19 outbreak earlier this year. Meanwhile, sales per square foot at Taubman's malls were an industry-leading $876 last year. However, while it didn't lead the way, Brookfield certainly didn't bring up the bottom, as its aforementioned $651 in sales per square foot were well above peers like CBL Properties, which only averaged $392 before the pandemic. Because of that, Brookfield's overall mall portfolio rates as above average, though it's not the best in the sector.

The other major factor to consider is balance sheet strength. Simon leads the group again as it's one of a handful of REITs with A-rated credit. That makes it really stand out in the sector since fellow mall REITs CBL Properties, Washington Prime, and PREIT are struggling to survive due to their weak credit profiles.

Meanwhile, Brookfield is closer to the top, as it has a strong balance sheet with lots of liquidity. Because of that, it has maintained its dividend this year despite the trouble facing its mall business, something even Simon hasn't done. Its balance sheet strength also gives it the financial flexibility to invest in its malls and turn them into marketplaces of the future.

Good, not great

Brookfield Property's mall business is near the top of its class. However, its portfolio isn't as big as Simon's nor as high-quality as Taubman's. Meanwhile, it doesn't have as strong a balance sheet as Simon, which has one of the REIT sector's best credit ratings. Because of that, Simon, not Brookfield, stands out as the best mall REIT.

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Matthew DiLallo owns shares of Brookfield Property Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.