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Are Mall REITs a Smart Investment in 2021?

While malls were negatively affected by the COVID-19 pandemic, it's important to remember that many mall retailers were struggling long before the pandemic shutdowns. However, in this Motley Fool Live video clip, recorded on June 15, Millionacres Real Estate Analyst Matt Frankel, CFP, and Motley Fool Editor Deidre Woollard discuss why mall REITs could still be interesting investment opportunities.

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Deidre Woollard: But I wanted to go through some of the good retail news because I think there is a lot of it. I saw recently the total retail rent collections hit 90.85% last month. That first-time since March 2020 that they've been over 90%. That has got to give some of the retail REITs a nice sigh of relief there. We are starting to see that really strong recovery and we're starting to see a lot of more interest in space in general. I would say it feels weird to look for silver linings in the pandemic. But I keep coming back to this idea that malls are getting more creative and I'm really finding it exciting because there's different direct-to-consumer brands that really built a follow-on on Instagram during the pandemic. Or there's more local pop-up stuff. There seems to be more innovation. People seem to be going back to the malls, not just for the usual traditional stores, but to have an experience. All of that experiential stuff that we were talking about before. The pandemic seems to be coming back.

Matt Frankel: Yeah and malls really took a gamble, if you will, in the past year or so. Traditionally to rent space in a mall, you're going to sign a 5-10 year lease at a minimum.

Woollard: Right.

Frankel: Malls have really embraced the 1-2 year lease structure recently, with OK we can't get a long term tenant in place now. We can't get the rent we want now, but we're going to just take a flyer on one of these direct-to-consumer brands, for example, give them a one year lease, see how it goes. If their sales are through the roof, they'll renew at a higher rate, sign a five-year agreement, things like that and so far it's really worked out. You mentioned how much in Simon (NYSE: SPG) in particular as one that was doing a real good job of this even before the pandemic at embracing direct-to-consumer brands. Because the idea is you can't get those anywhere other than online. It's an experience to be able to see these things in person. A lot of people want to see their clothes before they buy. I'm one of those people. I need to make sure things fit. But malls have done a really good job of creating experiences in general. The malls that survived. We'll talk about one in a little bit that didn't.

Woollard: The malls did survive, there's hope there.

Frankel: It's true. That's fair. The stockholders didn't. We'll talk about when that didn't really work out. But the malls that have been the most successful are the ones that really have pivoted to experiences rather than just traditional retail. Simon's been doing a great job at this, but they are not alone now. A lot of malls are bringing in these direct-to-consumer brands and finding innovative ways to fill spaces like with co-working spaces, with a lot of malls are putting hotels right attached to the mall to bring in business. Entertainment venues are being incorporated into malls themselves. A lot of like old Sears properties, for example, are being turned into entertainment spaces. They're not the food court. Restaurants you normally wouldn't see in a mall, are really being incorporated into these shopping malls and it's paying off so far.

Woollard: I believe we have a story in about one of the Sears that has been turned into a food hall, a whole like dining experience, like an eatery but not quite like that.

Frankel: Yeah and that's just one example. There's a whole company, Seritage Growth Properties (NYSE: SRG), their whole business model is transforming Sears into different things. There's one Sears that they transformed into a Total Wine, a Dave and Buster's (NASDAQ: PLAY), and two restaurants. When you think of what's a better use of space.

Woollard: That's pretty much all you need right there.

Frankel: What's a better use of space, a Sears or all that stuff? It's a no-brainer.

Deidre Woollard owns shares of Simon Property Group. Matthew Frankel, CFP owns shares of Seritage Growth Properties (Class A). The Motley Fool owns shares of and recommends Seritage Growth Properties (Class A). The Motley Fool recommends Dave & Busters Entertainment. The Motley Fool has a disclosure policy.


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