(Creative) Destruction in the brick-and-mortar meltdown.
Investors in retail malls didn’t need another wake-up call. They’ve been wide awake all year, hearing from Wall Street that there’s no brick-and-mortar meltdown even as the shares of their real estate investment trusts (REITs) have gotten crushed by the travails of brick-and-mortar retail and the over-malling of America. But late Thursday, mall investors got another unneeded wake-up call.
CBL Properties, a mall REIT with 119 mostly retail-oriented properties, reported earnings, and shares plunged 26% on Friday, to $5.92. They’d already been dropping for years because the brick-and-mortar retail meltdown is structural, and not new, and will not turn around before it’s finished melting down. Shares of CBL are down 50% year-to-date and 75% from May 2013.
“This quarter’s results fell below our expectations as our revenues were impacted by additional bankruptcies, store closures and rent concessions,” CEO Stephen Lebovitz summarized it in the third-quarter earnings report.
Though investors knew the brick-and-mortar industry is in turmoil, they were nevertheless taken aback by the fact that it can still get worse – and that the sacrosanct dividends of a REIT can get slashed in no time.
CBL reported fundamental problems with the mall-REIT business (Q3 compared to a year ago, unless otherwise noted):
- Revenues dropped 11% to $224.6 million.
- Funds from Operations (“FFO”) per share fell 7.1% and “FFO, as adjusted,” per share fell 12.3%
- Same-center Net Operating Income (parallel to same-store sales for retailers) at its malls fell 2.8%. This is a beautified version because CBL “excludes the impact of lease termination fees and certain non-cash items of straight-line rents, write-offs of landlord inducements, and net amortization of acquired above and below market leases.”
- Occupancy rate of all properties declined 40 basis points to 93.1%. Mall occupancy rate declined a full percentage point to 91.6%.
- Average gross rent per square foot at “stabilized malls” fell 13.7%: edging up 0.3% for new leases and plunging 16.1% for renewal leases. It shows what landlords have to do keep tenants.
- Stabilized mall same-center sales per square foot for the 12 months ended Sep. 30 fell 1.8% to $373. Hang on to that $373 in sales per square foot; Moody’s has a warning about that in a moment.
The company lowered its guidance for 2017 across the board, including FFO per share (to $2.08-$2.12). Same-center NOI is now expected to decline by 2% to 3%. And occupancy rate is expected to decline by 1.25 percentage points.
And then the real shock for dividend investors. Dividends are a major reason to invest in REITs. But the company slashed its dividend by 24.5% to $0.80 per share.
It was done to preserve cash. Many of the malls will have to be repurposed and turned into something else – “into suburban town centers that offer unique shopping, more food and beverage, fitness, health and beauty uses, services and more service-oriented businesses, which should certainly help the company adapt to e-commerce headwinds,” CEO Lebovitz said – and that requires money.
Downgrades hailed on the company, now that its shares have lost half their value so far this year. Wells Fargo downgraded the company to market underperform, and put a price target of $7 a share on it, over a buck above its current price — always lagging behind, always keeping that optimism going.
Moody’s, which rates the company Baa3 (one notch above junk) with negative outlook, had a special word in July about the space CBL is in with its sales per square foot of $373:
Retail REITs that own and operate malls with low average sales per square foot, below $400, are experiencing the most pronounced credit risk.
Moody’s points specifically at CBL along with Washington Prime Group (WPG).
CBL and WPG have the highest exposures to distressed retailers as a percentage of total gross leasable assets at year-end 2016, 22.2% and 21.7%, respectively. Operating performance for both REITs is expected to be vulnerable to further deterioration, owing to the anticipation of increased tenant bankruptcies and store closings and because of their regional concentrations and limited financial flexibility relative to other mall REITs.
Moody’s is still fairly gung-ho about the sector overall, despite what it calls its weak-mall exposure. And it mollifies us: the debts outstanding of those two REITs – $8 billion in total – account for only “4% of the aggregate debt outstanding at the end of Q1 2017 for all US REITs that we rate.”
So no problem. One or two at a time. The brick-and-mortar meltdown is not going to happen all at once. It’s picking up momentum, and it will drag on for years. Someone will eventually tear down many of these malls and use their space, including the large parking lots, for something entirely new. But that process – “creative destruction,” we like to call it – has already cost, and is going to cost, existing mall investors a bundle.
So other mall REITs dove in formation:
- Kimco Realty (KIM) down 2.1% today and 42% since end of July 2016.
- Macerich (MAC) down 2.2% today and 39% since end of July 2016.
- Simon Property Group (SPG) down 2.7% today and 32% since the end of July 2016.
- GGP (formerly General Growth Properties) down 2.9% today and 41% since the end of July 2016.
- Federal Realty Investment Trust (FRT) down 1.3% today and 25% since the end of July 2016.
- Regency Centers Corp (REG), down 1.8% today and 22% since the end of July 2016.
An irreversible structural change in an industry, such as brick-and-mortar retail, doesn’t play out in one gigantic crash. It takes its time. Retail will always be around, but the way it is being conducted is changing.
Some segments are considered “ecommerce-proof” for now, such as new and used vehicles, gasoline and other fuels, restaurants and bars, and still – to the greatest annoyance of Amazon – groceries. That’s 55% of brick-and-mortar retail sales. But the other 45%, the part that is typically taking place in retail malls, catches the full brunt of e-commerce competition and is rapidly losing share. And mall owners will have to find other things to do with many of their properties.
Sears risks running out of money just before the holiday selling season. Read… Sears Holdings Exhausts its Last Credit Facility
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But online financial pundits keep screaming that REITs are sacrosanct, that payouts “can’t” be cut, that dividends are totally secure, that you should buy, buy, buy…
When will apartment REITs follow malls?
More “follow-the-herd”. Only when do-nothing, ETF/REIT, autopilot, armchair, “risk-free” “investing” dies will reality again assert itself.
REITs went through a terrible time back in 1974, before many of today’s institutional investors were even born.
I remember the REIT bottom in 1974. Many were selling for 1/16, 1/8 of a dollar. That’s how they priced stocks back then. And there was no Amazon.com back then.
Maybe they are talking about J-REIT’s… those are fully backed by the Bank of Japan, at least until Haruchiko Kuroda can muster his one vote majority on the BOJ board of directors.
The BOJ now owns at least 5% of all the top twelve REIT’s in Japan and has taken to accept REIT-issued bonds as collaterals as well.
Pundits have been screaming about J-REIT’s for a while, and have been completely dishonest about them. Not a single one has warned potential investors J-REIT’s are completely at the mercy of the BOJ and that is not an investment, merely palliative speculation, and should be treated as such.
Wasn’t it before the Japanese bubble burst that the BoJ accepted stocks as tier-1 capital?
Slightly after the peak, in 1990, when some megabanks such as Sanwa and many sogo-shosha were showing signs of meltdown.
I use malls as a place to walk during inclement weather. I thank them for the free memories.
From Orange Julius … to the Orange Julian
I dont think apartments will follow the same path as commercial…
people need to live. People don’t need to shop in a mall.
Think about the scenario when the malls are closed and repurposed with high density residential real estate
They are doing this with at least one mall in Southern California. But it needs to be an area with high pricing and demand for housing, won’t work in Michigan or Nebraska.
Apartment REITs will follow a different path to disaster: median rents above median income due to excessive debts. As the REITs take on more debt to buy premium properties, they need to raise rents to keep a positive cash flow. Supply / demand curves tell us that demand drops as prices rise, even for price inelastic items such as places to live.
Once people simply can’t afford to live in an area, they are forced to move elsewhere. Businesses find it unaffordable to pay people a living wage, so they start leaving as well. Thus, demand drops, leaving units that must either be rented at a loss, or left vacant for a greater loss.
This is starting to be seen in the San Francisco / Silicon Valley area.
Maybe malls will bounce back for a while. Optimism is spreading in the economy. Even truckers are getting more confident: https://www.wsj.com/articles/todays-top-supply-chain-and-logistics-news-from-wsj-1509704716. Some of that will surely spread to malls right?
I suppose mall parking lots are great places to park semi trucks when the operator wants to pull over and sleep for free. Thanks for the free ZZZZs.
OK lil hint:
if WSJ is your one-stop source for market sentiment, you are missing the picture.Its called the grey lady for a reason…
https://www.youtube.com/results?search_query=dead+mall
A dead mall in my area just sold a stand alone anchor store, 200K sf and 12 acres of parking for $850K. They were lucky to find a buyer for any of it, 2 more anchor stores to go. The mall opened in the 70’s with a Sears, Macys, and JCPenny’s, all gone now.
Do you remember K Mart? Thanks for another distant memory.
200k st + 12 acres for 850k? Are you sure? A single home in your area probably sells for that much.
Yep and Yep.
I seem to have inspired someone…
Boo hoo. A lot of these mall owners have brought it on themselves….not updating and driving out interesting individual stores with increasing rent. As the malls expanded, the mall parking became such an issue that it became a drudge to go. And security…well that was a no go for me.
A lot of the mall issues are compounded with declining quality/value of the “brand” stores.
Nordstrom’s, Neiman’s, Saks started tiny footprint store template in kinda B malls close to 20 years years ago which sounds like a good tenant but in reality was a bad idea. The stores did not offer near the full upscale offerings or experience We called them the “return stores,” when we bought at the big stores but changed out minds and returned to the smaller closer stores. A lot of these stores closed down.
We are over-malled, over-stored with crap. As usual, the powers that be are asleep at the wheel confident that old paradigms will live forever.
Exactly. A mall filled with chain stores is a chore. The same tired, middle-of-the-line produce you can find anywhere just with the mall mark-up thrown on top for fun. It’s not all about bricks ‘n’ mortar slayer Amazon. A lot of this is self inflicted.
Yes, going to a mall is a real drudge. Fire up your car causing pollution and expense. Spending hours parking and walking. Now I just order from my bed or couch at Amazon.com.
Over-malled is a correct term for several markets, especially considering mall-owning REIT’s are busy adding more capacity at a time they should at very least pause and reflect.
Sawgrass Mills (Ft Lauderdale) is presently adding a new expansion which will feature 25-30 new stores.
Aventura Mall owners have proposed to city officials to add over 20,000 square meters of retail space. This was before the Sears anchor store closed down a few months ago so they may have shelved their plans.
Scottsdale Fashion Square is adding more space right now, no idea how much but they are doing it.
And this is to say nothing of the countless smaller malls that only make the local news.
These plans were started years ago, but as Mr Richter often remarks the downward trend in brick and mortar retail has been going on for quite a while. If data were inflation adjusted, the decline would be even more noticeable and, here’s the funny bit, it’s not due to some financial crisis that is bound to go away. It’s a structural change that will play over many years and mall-owning REIT’s seem to be either woefully unprepared to deal with it or just hoping if they ingnore it, the change will go away.
Note that the phenomenon of “over-malling” is not limited to the US. The Philippines are swamped in malls, some of them among the largest by retail space in the world, and we have all read about the mega-malls in China losing money just to have tenants.
While both countries are growing, these malls assume not merely an explosive growth in disposable incomes and a radical change in shopping habits: Chinese shoppers drive a hard bargain and usually don’t buy at inflated mall prices.
This means that either mall prices have to come down or that something has to be invented to convince them they have to pay more for exactly the same product.
The banks don’t care if they lend $trillions to build new malls, the money was all created out of nothing. After all, China has built multiple vacant cities with no populations living inside all on QE. If they can do it, we can do it. I need more covered, heated, or air conditioned places to walk for free when the weather outdoors is inclement.
The banks may not care, but the US Federal Reserve does, as highlighted by their continuous concerns about commercial real estate. And if the recent Communist Party Congress in Beijing was anything to go by, Chinese authorities are worried as well.
It seems like all the malls are anchored by a Sears or JC Penney. Good luck with that.
You forgot to add “also anchored by a Toys R Us”. They filed for bankruptcy you know?
No, they are “anchored” by the religion of consumerism and an irrational debt binge. The old incumbents are just different churches of the same religion. In “ye olde dayes” one bought an item with the expectation that it was durable, well made, repairable and of passing it on to the grand children (even clothing!). The municipal tip has since grown at the same rate as those hideous malls, job offshoring and debt expansion. At all sides of the equation, we see ridiculous assumptions which are the *real* “anchors” of a sick system. (I also hate the sick stale recirculated air in those temples to rampant consumption)
There are 2 large malls in Orange County, CA which tell two different stories. Fashion Island mall is located in Newport Beach and in the 90’s it was always packed with shoppers. When I’ve been there in recent times, it’s been pretty empty and is spooky quiet by the early evening. About 10 miles away is the Irvine Spectrum mall. It seems to be always busy and the mall has been expanding every year. Its probably 3 times larger from when it first opened. My guess is that Fashion Island, being in an area where its mostly homes where the children have grown up and left, has mostly retirees in that area. These real estate wealthy folks are going to the various Fashion Island restaurants but not the shops. The Irvine Spectrum mall is in an area with lots of nearby new housing developments. These homes have young families who need lots of things for a growing family. If my observations are correct, then I suspect part of the decline in retail is due to aging demographics and the associated change in shopping behavior.
New Orleans still has not redeveloped the old Six Flags amusement park damaged in Katrina. Someone from there told me the place is overgrown and a refuge for snakes, critters, and is being overtaken by mother nature. My father in law worked in the one in NJ during his retirement and I think it is now closed. I find this another indicator of how families no longer have real disposable income.
I blame all of Six Flags’ misfortune on Mr Six being retired.
That sounds like a good theory. All of the abandoned malls I have seen are in areas with older housing, and older people living in them. People who live on social security don’t usually have a lot of discretionary income.
After the folks take out a $million mortgage for a 50 year old termite and cockroach infested 2 bedroom frame home in Newport Beach, how can they be expected to have any money left over to go shopping in a mall? Especially if they also have a subprime 7 year auto loan on an already 6 year old vehicle?
When I think of malls I always think of the NYT’s Thomas Friedman, who is forever writing columns and books and appearing on TV about the new economy based on all his wisdom and insight gleaned from talking to taxi drivers in Cairo, Dubai, Singapore, and elsewhere.
Despite all his wisdom and insight his wife’s real estate investment company lost millions of dollars in shopping malls in 2009 during the last crash. I guess he was too busy taking taxis, writing his column and going on TV to warn her.
Maybe she didn’t listen to him? Or got tired of listening to him after 20 years of listening to him?
A lot of us happily long-time married guys understand that our beloved spouse too has limits, and we conform to them. My wife got tired of my economic rants a long long time ago, and so I save my breath to cool my porridge, as they say.
Mine keeps threatening to number my rants — “sigh. number 15…. again”.
Mine finishes my rants for me now when its just the two of us.
She has my talking points down pat and could likely give the presentation better than I at this point. Poor thing.
What is shocking, at least for my wife is despite me ranting in her ear about the economy and monetary issues for quite a few years now, she doesn’t buy into any of it.
She thinks this will go on forever and ever and thinks my obsession with economics is just a hobby for me to bide my time with.
Perhaps she’s onto something.
Thanks for chronicling this story Wolf. So much of modern finance is abstract. The mall story is not only fascinating, it is tangible we can see malls in our neighbourhoods struggle, often being closed and even demolished. You do a great job of connecting the terrible financial decisions made over the pervious decades with real world consequences.
Remember all those kids the malls didn’t want on Friday and Saturday nights?
They got the message.
Good point. Revenge of the mallrats.
Once you start buying on line with Amazon prime, you make fewer and fewer trips to the brick and mortar.
DK – No kidding! My friend’s wife was complaining about not being able to find handkerchiefs for him any more. I mentioned I’d seen them in a local store downtown for about $1.39 each, “Hav-A-Hank” brand, which I’d always found funny. But the place I’d seen them, while they have their own parking lot, is kind of hard to get to, has banker’s hours, etc. Then I jumped on Amazon, found some nice Van Heusen ones for a $13 for 13 of ’em, asked her how many she wanted to buy and she said 12 or so. Since I have Prime I told her I could get them with free shipping, so she handed me cash and I ordered them; this was on Thursday and she’ll have them today. Problem solved.
The mall business model was viable back when the middle class had significant disposable income . Today they are being kept alive by cheap ZIRP financing . On a slightly different note , here is a young entrepreneur making 6 figures doing “retail arbitrage” ( the new post recovery job class .) Buys brick and mortar stuff , sells via amazon . Go figure.
https://www.cnbc.com/2017/11/02/28-year-olds-company-makes-millions-selling-walmart-buys-on-amazon.html
People have been doing that kind of arbitrage for decades on many online platforms, though maybe not as profitably as this guy. EBay is one place they sell things picked from local thrift stores for cheaper. I had a friend 15 years ago finding unique t shirts at thrift stores and there would be some person online who would be willing to pay a lot more for some wacky item hard to find locally. Or in high priced cities prices may be high enough for local retail that it makes sense for someone to order some things online, because even with some extra intermediaries in the chain (retail, this guy, Amazon) it’s still cheaper or at least similarly priced and more convenient.
I’ve also seen stocks of certain items such as phone cases, stands and other specific things completely bought out quickly from cheap places like Japanese dollar stores. My speculation is that these mostly go to online arbitrage, since individuals in the local market probably aren’t buying hundreds or thousands of cases for few year old, obscure phone models in a day or two locally.
I wonder how long before companies selling these things at clearance realize there’re leaving money on the table by not doing what he’s doing on Amazon and start competing more in that niche. Or maybe it’s not worth it to them for the added complexity and work and he’s safe in his niche for a while.
There’s a flea market in south fl that sells tens of thousands of phone cases and accessories from china. They sell all kinds of closeout items including hair products, watches, and bric-a-brack. They advertise on tv and issue coupons too.
Interesting phenomena (i.e “retail arbitrage”). It is kinda off an underground economy and perhaps contributes to the demise of brick and mortar stores. Maybe it’s a product of poor quality job creation. The point is amazon isn’t always your best buy and they have a 30 % return rate. Maybe amazon has become an online flea market .
I would not consider selling stuff on Ebay to be a high quality job. Source: This is what my friend and I do. But in this economy, it’s that or go be homeless.
“Moody’s points specifically at CBL along with Washington Prime Group (WPG)”
Ha!! In August cigar-butt collector Bill Miller was touting CBL and WPG. Of course, he’s also collector of Bitcoin.
https://www.cnbc.com/2017/08/11/bill-miller-iv-why-im-betting-on-shopping-centers.html
Anecdote:
Some time in the 1990s, my hometown renovated its mall: new tile, paint, new fixtures, new plants, new decor. . . and raised the rents. A year later it was completely vacant. Mervyns left first, then The Bon Marche then JCPenneys. Now it’s empty.
It’s in Washington State, kinda far for Dan Bell’s Dead Mall Series, but it would be cool to see what it looks like inside.
In the late 70s/80s that mall was the funnest hangout. The city drove out all the teenagers and it died.
Amazon has had a 10% advantage over all brick and motar
for about 20 years (lack of sale taxes).Give any American that
advantage and they too would wipe out the competition.
That free ride has ended
reverse the process and remake malls as ebay auction houses, consignment, and swap meets. people have way too much stuff, they want to sell there is someone else ready to buy at a price. tired of buying a pig in a poke on ebay, look touch and feel the item. then let the vendors pick up the rent, it’s never about money, it’s about foot traffic. put all the places I like to buy discount computer gear, clothes, groceries in one place like the old discount outlet, but more energy, more variety.
Except Ebay tried having brick and mortar stores where you’d bring your stuff and they’d handle the photos, assessing the value, posting the listing, etc. Of course this would involve more fees …. it never really took off and this was in the early 2000s.
As an Ebay seller and someone who works with an Ebay seller now, selling on consignment just doesn’t work. Ebay’s already got the fees up as high as the market can bear, and when you sell something for someone and you want 25% or 30% for yourself because you have to get that, and that’s after paying Ebay and PayPal their fees, well, the customer usually has some time, waiting for the item to sell, and when they finally get paid, less than they think they should have gotten even when you show them the math, it just leaves a bad taste all around.
It’s much better to offer people lowball cash prices for things, give ’em the cash and now the item(s) no longer a worry, out of sight and out of mind.
This is why Ebay physical selling-service stores are only a memory for those of us with 20 years on Ebay behind us, and pawn shops are thriving. There are even shows on TV about pawn shops these days.
Most of the used cars on dealers lots are bought at auction. The various car history services level the playing field, and allow for more competitive and uniform pricing. (It’s no longer necessary to kick the tires) I was on Ebay to settle an estate, I know how you build a seller profile, so that buyers know you and your item. The pawn shop undermines that integrity, which is why the parade of experts, (all friends of the owner) have to settle the matter, and usually with a carefully worded opinion. Its possible to trace an item, like an article of clothing to a sweat shop in Bangladesh. So its more than a matter of buying and selling unvetted goods, it’s also a matter of lifestyle. When you buy from a person, that person is really selling themselves to you.
1) As long as interest rates remain low, disposable income will remain low and discretionary income that would go to mall stores won’t go to mall stores.
2) The standard business cycle applies to malls just like everything else. Malls are in decline because adequate substitutes at better prices and with more convenience are available in many cases. Expect lots of them to go away as a function of nature.
3) If malls want to change with the times they need to become destinations in addition to shopping centers. What is needed and how can the malls provide it? It used to be junk overpriced retail. Since disposable, discretionary income is low because interest income is low, causing overall demand and, consequently, employment, to be lowered, malls need to adapt. To use an extreme as an example, The Venetian in Las Vegas has a mall that’s a destination because the Venetian is a destination. Time to think bigger and differerently.
4) Nothing will change even a little with malls unless and until the Federal Reserve normalizes interest rates and ends support for those who depend on low rates for the ends they require, none of which support main street.
Bulldoze ’em. I’ve never looked at their bones, but they look cheaply built. They aren’t craftsman bungalows ready to stand the test of time—I see no sentimental loss, architecturally speaking.
You’d think the utility bills would be outrageous to heat/cool these things. They aren’t suitable for housing like everyone opines. Put up another commie-style housing complex in its place and move on.
Who goes to the mall these days?!
I worked in an office that was a re-purposed mall in San Antonio. It is a novelty at first, with tours for visitors. But inefficient and a nuisance. The company considered a second re-purposed mall in Austin, but instead opted to bulldoze an existing mall structure and start from scratch.
Once electric cars become more popular, gas stations will be joining their mall brethren in the graveyard. Before that, increased fuel efficiency driven by higher gas prices means fewer gallons of gas needed.
Of course, most gas stations make more money from their convenience stores than from the gas itself, so they’re more interested in how many visits you make than how many gallons you buy. so maybe if car makers use smaller gas tanks they can keep gas stations alive a little longer :)
“Once electric cars become more popular, gas stations will be joining their mall brethren in the graveyard. ”
Electric cars will never become popular because recharge times are impractical. Lots of people ignore this or make excuses as to why normal people don’t care about it. Under the best circumstances, recharge times are excessive and provide limited miles per minute of recharge time. Under slightly less than best circumstances, walking competes effectively with electric cars.
Anyone have stats on “Outlet” malls? In my experience, they seem to be doing well.
I agree with A B, re-purpose traditional malls into “antique” malls & overstock outlets. Another growing business, if close to the interstate.
Here in Palm Beach county in South Florida we have strip malls anchored by grocery and liquor stores with cheap gyms and the occasional Starbucks or Dunkin’ Donuts. The other major occupants tend to be doctors, dentists, or other medical services, dollar stores and payday lenders, and cheap food. This is where everyone shops, not the big malls.
Said strip malls are everywhere with the same stores often within 1 or 2 miles of each other. Major retail type malls are also here, but I don’t see how they stay in business except for possibly the tourist/seasonal factor.
My two swimming pool water walking buddies (ladies age 91,and 85, me late 60’s) were just discussing how we never go to the major malls anymore. The stores all have the same made in China low quality stuff, and we all worry about having enough money to cover all of our healthcare expenses for copays, deductibles, OTC drugs and treatments, etc, not to mention the high price of food.
The nearby Wellington Mall put in a movie theatre recently to try to bring people in. Beautiful mall, but few shoppers except in the winter high season. On the other hand, Aldi and Trader Joe’s were packed on Saturday.
Some of my lady buddies were big shoppers in their prime, but their kids and grand kids are not. No one has any money for non essentials and even those with higher incomes are buying mainly from Amazon as they don’t want the hassle of parking, walking, and shopping in a mall where they cannot find exactly what they want to buy. Even my older friends now use Amazon….
No wonder the malls are in trouble…