In the coming weeks, shopping center owners Simon Property Group Inc. and Kite Realty Group Trust will face the tall task of persuading investors during quarterly conference calls that everything is just fine—despite a hailstorm of news stories across the nation using terms like “retail apocalypse” and “death of retail.”
The two Indianapolis-based real estate investment trusts have seen their stock prices plunge, amid a torrent of retailer bankruptcies and stories about the continuing woes of Macy’s, Sears and JCPenney. Simon shares have tumbled 30 percent and Kite 36 percent over the past 12 months.
More pain could be in the offing for investors, of course. But it’s also possible that the beat-down has created a buying opportunity for the ages—giving investors the opportunity to scoop up quality companies on the cheap. As none other than Warren Buffett has said, investors “should try to be fearful when others are greedy and greedy only when others are fearful.” And these days, many investors are in a virtual panic over brick-and-mortar retail.
Yet some portfolio managers believe the market is painting the retail sector with too broad a brush. Yes, they say, many malls will go under, as will many retailers. But developers focusing on high-end properties—a description that fits both Simon and Kite—should fare just fine.
One of the believers, Matthew Werner, portfolio manager of West Loop Realty Fund, told Forbes this month that the litany of retail closures announced in 2017 provides “a great opportunity for shopping-center REITs to upgrade to better tenants.” He called the recent lows hit by Simon and another high-end mall owner, GGP Inc., “crazy.”
Indeed, investors who are bullish say retailer instability will give landlords the opportunity to replace underperforming department stores with an eclectic mix of restaurants, movie theaters and other entertainment venues that pay higher rent and boost customer traffic.
In a conference call early this year, Simon CEO David Simon said Sears leases space in about 30 of its shopping centers. He said Simon needs to re-tenant just four of those stores to replicate the income it gets from all those stores now.
Werner told Forbes department stores pay as little as $4 per square foot in rent vs. $80 for the specialty retailers that fill mall’s interior corridors.
That’s not to dismiss the need for investors to approach retail with caution. Some shopping center owners are highly vulnerable, in large part because they own second- or third-tier properties without the drawing power to attract desirable tenants, or maybe any tenants, if anchors leave.
One player that’s sputtering is Ohio-based Washington Prime Group—the company formed three years ago when Simon spun off its Class B and Class C malls, a move that now looks exceedingly well-timed.
Simon at the time explained the move by saying the properties were getting short shrift as the company focused on larger acquisitions and redevelopment projects.
But some analysts saw an ulterior motive. “Simon sees rough seas ahead for low-productivity, Class B regional malls—and rightly so!” UBS analyst Ross Nussbaum wrote at the time.
After Washington Prime reported a 5.8 percent first quarter decrease in comparable-property net operating income this spring, Moody’s Investors Service revised its outlook on the company to negative, citing its “concern about the potential for accelerated declines as these malls are more vulnerable amidst the challenging retail climate.”
In contrast, Simon in the first quarter saw a 3.8 percent increase in comparable-property net operating income, and Kite saw a 3.1 percent rise.
Kite’s latest investor presentation, filed with the Securities and Exchange Commission in June, casts the company as well-positioned for years of prosperity.
Two-thirds of its 120 shopping centers are anchored by grocery stores, widely viewed as top tenants because of the traffic they generate. Ninety-three percent of its tenants are “internet resistant,” Kite says, due to their focus on such areas as food, fitness and entertainment.
Similarly, Simon—which owns nearly 200 U.S. properties and has holdings around the globe—sees a bright future. In April, the company reaffirmed its guidance for 2017, projecting that funds from operations will climb about 6 percent.
“This expected growth is a testament to the strength of our company and our ability to actively manage our portfolio to provide industry-leading returns to our shareholders, even in the current choppy retail environment,” David Simon said at the time.•