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What The Coronavirus Is Doing To Our Malls

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With COVID-19, retail landlords are faced with a situation unlike anything they have dealt with before. 

Within a matter of days, starting with Patagonia’s announcement on March 13, dozens of retailers across the U.S. announced their plans to temporarily shut their doors, to try to help curb the spread of this deadly virus.

The list has grown larger, by the hour, ever since. It includes Apple, Nike, Nordstrom, Macy’s, Tiffany and Dick’s Sporting Goods, among many others. At this point, it would be easier to keep track of what is still open for business – and that would be, in large part, grocery stores and pharmacies selling essential goods.

The biggest mall owner in the U.S. finally pulled the trigger on Wednesday, with thousands of temporary store closures already announced by this point in time. Simon Property Group (announced the afternoon of March 18 that it has shut all of its malls and outlet centers, like The Forum Shops at Caesars in Las Vegas and The Galleria in Houston, through March 29, at least.

Unibail-Rodamco-Westfield and Taubman Centers followed suit. Taubman, notably, said it would keep two of its open-air properties operating, as everything else shuts.

The mall owner’s mandate does not matter, however, in a city or state where a government mandate might have been invoked. In Bergen County in New Jersey, for example, County Executive James Tedesco ordered all malls to go dark until further notice, beginning this past Tuesday. That hit Wesfield’s Garden State Plaza and Brookfield’s Paramus Park mall.

What’s next? Nobody really knows for sure. I’m sure many of you, like myself, are glued to a television or computer screen at some point during each day checking for updates.

But one thing we can say with certainty is this is going to impact mall owners in more ways than one.

We would anticipate many retailers are not going to be able to pay rent when they are not in business, at least temporarily. If the closures last another month, beyond April, maybe tenants begin asking for abatements and deferrals. Maybe, in some instances, mall owners will have to make the call to evict a tenant altogether.

And even if a mall goes dark, these operators still have their own bills to pay. They have salaried employees and other monthly expenses.

Macerich has already announced a dividend cut in the midst of the coronavirus pandemic. We would expect more mall owners to make a similar move. We are also watching to see which companies might be tapping lines of credit during this crisis. We would expect Simon, with the strongest balance sheet of the bunch, to weather this storm better than its peers.

The fluid nature of this pandemic and the heightened uncertainty is what makes COVID-19 (another name for the virus) such an unprecedented thing to work through. Retailers have no idea when they will be able to turn the lights on again. Some companies will literally be bringing in $0 in sales for weeks on end. This will only accelerate the number of store closures, and then bankruptcies, in retail. And we could see some landlords forced into bankruptcy as well.

As a REIT analyst, I suspect to see significant changes in our retail REIT coverage spectrum that currently consists of 18 shopping center REITs (with a market cap of $51.1 billion) and 7 mall REITs (with a market cap of $45.9 billion). Because REITs (by law) must payout 90 percent of their taxable income, we see continued pressure on these highly stressed landlords that will lead to unexpected dividend suspensions (like we’re seeing in the lodging REIT sector at this time).

If “social distancing” practices are prolonged, we envision the retail REIT sector shrinking, especially the mall REITs that have already been challenged with significant store closures. At the end of the day, it boils down to survival of the fittest and the weaker mall REITs could become dinosaurs much faster than expected due to these this “black swan” pandemic.

I own shares in SPG and BPY.

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