Beware of Bargains at Shopping Malls -- Heard on the Street -- Update
By Carol Ryan
After years of worrying about e-commerce, mall owners face
another unwelcome reckoning from the pandemic. Their stocks appear
cheap, but investors are better off window shopping until the
long-term hit to rental income is understood.
Retail real-estate investment trusts have been among the biggest
losers in this year's health crisis. Shares in Europe's
Unibail-Rodamco-Westfield, which owns Westfield-branded shopping
centers in London and San Francisco, have fallen by almost
two-thirds this year. The market value of U.S. peer Simon Property
Group has halved. On paper, these once-dependable stocks now come
with dividend yields of around 10% even after slashing payouts.
Shopping centers used to offer a steady, reliable source of
income -- one reason why they traditionally appealed to pension
funds. This also explains why mall REITs headed into this crisis
brimming with debt. European names have average net borrowings of
13.4 times projected earnings before interest, taxes, depreciation
and amortization, according to property consultant Green Street.
U.S. peers carry slightly less. It is increasingly difficult to
judge where their rental income will settle in the future. Less
than one-third of rent due for April was collected by U.S. mall
landlords, according to Fitch Ratings.
Permanent rent cuts will be needed to avoid a spike in
vacancies. Even well-funded international brands like Swedish
fashion chain H & M are negotiating reductions of up to 25%.
Bankruptcies of department stores such as J.C. Penney could be
especially tricky: So-called cotenancy clauses in the U.S. allow
retail renters to break leases without penalty if big anchor
tenants aren't replaced within a year to 18 months.
The pandemic has also accelerated the existing threat posed by
e-commerce to retail landlords. By the end of this year, 23% of all
total European apparel spending will be online, according to
Bernstein estimates, up from 18% in 2019. The U.S. faces a similar
ramp-up in e-commerce at a time when it has record levels of
physical shopping space. Today, there are nine malls for every
million households, UBS data shows. This is up from eight in 1980,
when e-commerce didn't exist.
Debtholders are bearish about the creditworthiness of mall
tenants. The yield on 10-year bonds issued by fashion brands in
Europe has increased by nearly 4 percentage points since March to
6.6%, according to Green Street's Rob Virdee. The 2.1% average
yield for issuances by retail landlords seems complacent by
The real estate they own is some comfort for both stock and
bondholders, but valuations are highly uncertain right now.
Enterprise values, which include debt as well as market values,
offer a good indication of how investors are pricing Covid-19's
impact on underlying property portfolios. URW's enterprise value
has fallen by a modest 15% this year, while Simon Property's has
With shopping malls facing a turbulent future, bargain-hunters
on the stock market may find better deals elsewhere.
Write to Carol Ryan at firstname.lastname@example.org
(END) Dow Jones Newswires
July 08, 2020 10:35 ET (14:35 GMT)
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