Malls are coming back to life—and that’s good for the economy, their communities and their own shaky bottom lines.
But the early days at newly reopened malls and shopping centers will look and feel noticeably different for the time being, with many supporting online purchases with offline pickup.
Retailers including Chico’s, Five Below and the parent company to Coach, Kate Spade and Stuart Weitzman brands reopened last month with convenient curbside, or similar, services available—features set to define store-centric shopping for the near term.
Now that there are signs of life at shopping malls around the country, retailers might start paying rent again, reversing a troubling trend while brick-and-mortar store closed their doors to consumers. A number of retailers have worked with landlords to negotiate rent while little revenue was coming in.
As retail begins its reboot, mall real estate investment trusts (REITs) have a number of concerns on a number of fronts.
Macy’s CEO Jeff Gennette has openly discussed analyzing profitability to determine which stores make sense to open, when extra coronavirus costs like frequent cleanings and sanitizations, new signage, and other protocols are factored in. That means some of the company’s currently closed stores may go dark for good.
Plus, the recent rash of retail bankruptcies has cast an ominous shadow over the sector, which has seen store-based players including J. Crew Group, Aldo Group and Neiman Marcus file in rapid succession. GNC, the vitamin chain, and J.C. Penney are both expected to file Chapter 11 bankruptcy petitions as early as Friday, with the latter likely to close as many as 200 stores as part of the proceedings. Bankruptcies can help debt-saddled retailers more easily escape from leases at unprofitable locations and then reorganize operations focused on their revenue-generating stores.
Store closures will be an ongoing issue for the REITs, given the expected rise in bankruptcies. Bankruptcies at anchor stores could jeopardizing the remainder of a mall’s tenancy, as REITs look to these linchpins to draw footfall. Then there’s the issue of co-tenancy—some leases stipulate that one tenant can leave if another departs, potentially leading to a domino effect.
There are still a lot of unknowns coming down the pike, like whether consumers are interested in mingling at malls and spending while tens of millions are suddenly out of work. And experts continue to sound the alarm over coming second-wave infections, while officials warn of reopening the economy too early—and doing more harm than good.
Simon Property Group
Simon Property Group (SPG) began reopening 49 malls at the beginning of the month and now has 77 operational again. CEO David Simon says he expects half of the company’s 209 centers open within the next week.
SPG is “not forcing the issue” of reopening, Simon said during the company’s quarterly earnings call. Rather, it wants to “help these local communities because, frankly, they depend on our sales tax and our real estate tax.”
Simon believes municipal governments are smarting from the lost tax revenue that comes as a result of weeks-long closures. “I think, finally, we’ll garner some respect that we deserve,” he told analysts, noting SPG was the first large retail owner and operator to shut down entirely to address the coronavirus pandemic and now the first to reopen in line with government guidelines.
So far, shoppers have responded positively to the reopened malls and sales have outperformed tenant expectations in some cases, Simon said. Twelve of SPG’s designer and international Premium Outlets are now open and retail tenants including Dillards, Macy’s, Belk, Nordstrom and Neiman Marcus have shared reopening plans.
“Each situation is analyzed individually based upon our tenant’s market position, their financial status and the history and depth of our relationship,” Simon said of how SPG works with each client. “Our tenants are eager to reopen their stores and we are working with them to do so.”
Overseas locations in Europe are more prepared to reopen, because the rules there are clearer than the myriad municipalities governing stores across America. Most of SPG’s Asian mall operations have opened as well and seen an uptick in sales, with some comping higher than the prior year, Simon said. “They’re taking advantage of pent-up demand,” he said. “And I think others that aren’t ready are missing that opportunity.”
Simon said the amount of rent collected so far has been “much better” than what some “prognosticators” were predicting. “We will navigate this. This is not easy, but I just think it’s better to have our discussion directly with the retailers. And the bottom line is we do have a contract and we do expect to get paid,” he said.
SPG has investment stakes in Nautica, Aéropostale and Forever 21, prompting speculation that it might make other acquisitions to buoy its own mall store mix as retail bankruptcies rise. “We’re not going to rule it out. We’re only taking inbound calls,” Simon said. “So, if people want us to think about something, we’re happy to do it. But we’re not out there running around soliciting investments.” SPG, he added, is in “a position to be opportunistic if we think it helps our business.”
For the quarter ended March 31, SPG’s net income fell 20.2 percent to $437.6 million, or $1.43 a diluted share, from $548.5 million, or $1.78, in the year-ago quarter. Total revenues fell 6.8 percent to $1.35 billion from $1.45 billion, which included a 1.4 percent decline in leasing income to $1.26 billion from $1.28 billion. The company said funds from operations, of FFO, per share—a REIT measure showing cash flow from operations—was $2.78, lower than the $3.04 a share from the year-ago quarter.
SPG made no mention of Taubman Centers Inc., the rival Simon Property took an 80 percent majority stake in in February. That deal hasn’t closed yet, and still requires SPG’s shareholder approval.
The Macerich Co.
Macerich, which owns 47 U.S. centers, has started reopening 13 locations, hoping to have all properties open by mid-June. During the REIT’s first-quarter earnings on Tuesday, treasurer and chief financial officer Scott Kingsmore said Macerich collected 26 percent of total rents in April, and as of May 8 collected just 18 percent of rents due this month.
Like SPG, the company is in ongoing rent discussions with tenants, many of which are seeking deferrals, CEO Thomas E. O’Hern said on the company’s conference call. Given the ongoing uncertainty around store openings, “I would expect those conversations to go on and stretch out into June,” he added.
That said, O’Hern is optimistic about the need for physical stores.
“This crisis has shown the importance of brick-and-mortar locations as key channels of distribution. Although it has accelerated sales at many digitally native brands, the increased sales cannot make up for the lost profits from physical stores,” O’Hern said, noting the high delivery and customer acquisition costs that come with e-commerce.
Many Macerich retail tenants have been fulfilling online orders from their mall-based stores, a trend O’Hern expects to be “even stronger than it was pre-COVID.” Two dozen Tysons Corner tenants are fulfilling an average of more than 8,000 packages daily, and the Coach store at Chicago’s Fashion Outlets is No. 1 in curbside delivery across the entire REIT fleet. At the Scottsdale Fashion Square in Arizona, one department store continues to be the top location for online fulfillment within that particular chain. Retail stores at the Washington Square center, meanwhile, fulfill an estimated 28,000 online orders per day, O’Hern added, noting that contactless payment, curbside delivery and online ordering for in-store retrieval will be popular for the long haul.
“Good retail is not going away, especially in A-quality centers,” O’Hern said, noting that in China, 90 percent of the malls had reopened by March 22, or nine weeks after the country’s shutdown, and footfall “has since recovered to an average of 85 percent of the prior year’s traffic.” Many of their mall retailers, including H&M, Apple and Lululemon, are also big in the U.S., he said. Doug Healey, senior executive vice president of leasing, expects stateside “reopenings will be very promotional” in order to sell through accumulated inventory.
Macerich has co-hosted a webinar to help retailers understand the federal government’s stimulus package and access some of those funds. It has also donated food and supplies to help first responders, as well as donated its centers for essential functions, such as blood drives, drive-through testing facilities and drive-through farmers’ markets, O’Hern said. To reopen, Macerich will follow all government requirements, clean and sanitize regularly, install social distancing signage and resume tenant construction.
Macerich posted a 3.8 percent decline in net income for the quarter ended March 31 to $7.5 million, or 5 cents a diluted share, from $7.8 million, or 5 cents, in the year-ago quarter. Total revenues inched up 0.2 percent to $227 million from $226.5 million, which included a 0.1 percent slip in leasing revenue to $210.7 million from $211.0 million. The company said its FFO was 81 cents a diluted share, flat to last year’s figures.
Tanger Factory Outlets Inc.
In late March, Tanger Outlets said it offered all tenants the option to defer April and May rents interest free, payable in equal installments in January and February of 2021. As such, rent collected in April represented 12 percent of the amount billed, it said.
“While the company’s preference is to work with its tenant partners to reach a financial resolution that positions both parties for long-term growth, it reserves all rights under its lease agreements and will pursue legal remedies to collect rent as appropriate,” CEO Steven Tanger said Tuesday.
Operating 39 Tanger Outlet Centers, the REIT has more than 320 different tenants. The company has been working with tenant partners to get stores reopened quickly so they can “start clearing their excess inventory.” Tanger was optimistic about near-term opportunities through “new permanent and temporary popup stores to help retailers monetize” stock that’s quickly growing stale.
“In good times, people like a bargain, and in tough times like this, they need a bargain,” he said.
With governmental mandates easing or lifting, 16 percent of stores are opens, up from just 6 percent at the lowest point, Tanger said. Some are open only for curbside pickup.
“As we look ahead, the ultimate duration and impact of the pandemic is very difficult to forecast. In the near term, we continue to endure store closures, cautious consumer behavior and the impact of rent deferrals,” Tanger said. Because Tanger Outlets don’t have any big department stores as a major anchor, Tanger said most tenant leases contain have some form of co-tenancy clause based on an occupancy requirement.
Tanger Outlets will review its local property tax bills. “We feel the property tax provides revenue for police, fire, teachers, first responders. So, there’s a balance in being a good corporate citizen and being sure that the property tax is reflective of the value of the property in today’s world,” Tanger said.
The REIT swung to the red for a first quarter net loss of $27.4 million, or 30 cents a diluted share, from net income of $61.7 million, or 66 cents, last year. Total revenues fell 9.4 percent to $111.6 million from $123.2 million. Rental income for the quarter ended March 31 fell to 9.5 percent to $108.6 million from $120 million. Tanger’s FFO in the quarter was 50 cents a diluted share, versus 57 cents in the year-ago quarter.
