This week was supposed to mark the opening of one of the biggest (and longest-planned) retail projects in U.S history—the American Dream Mall in the New Jersey. Parts of the property, including an indoor ski slope, have been opened for a few months. But on March 19, the American Dream’s developer, the Triple Five Group, intended to open the project’s retail section, water park and restaurants. With the new health guidelines coming into effect in New York and New Jersey, however, American Dream will remain closed until further notice.
This is a story that is playing out across the regional mall sector, which was already in a severely weakened state before coronavirus arrived in the United States. In many states and municipalities, including New York, New Jersey, California, Connecticut, Illinois, Massachusetts, Ohio and Washington, governments are requiring that businesses including restaurants, bars and movie theaters—the staple regional mall tenants—close their doors and only provide pick-up and delivery services if possible.
Meanwhile, a growing number of retailers, Apple, Urban Outfitters and Lululemon among them, have announced they are opting to close stores for the next few weeks out of concern for the safety of their customers and employees. Others, like Kate Spade and the Gap, have scaled back their operating hours. And there is expectation in the market that more retailers will follow their example. But as closings announcements accumulate, the publicly-traded chains’ stocks are getting hammered.
With the Centers for Disease Control and Prevention (CDC) recommending limiting public gatherings to no more than 50 people, some malls are remaining closed as well, including King of Prussia mall in Pennsylvania and Providence Place in Rhode Island. Others are shortening their hours. Meanwhile, a worker at one of the stores at The Mills at Jersey Gardens in Elizabeth, N.J., has tested positive for the virus. The store the worker was associated with remains closed, but as of this morning, the mall, owned by Simon Property Group, was still open for business.
“These are very unusual times, I can’t tell you of another time when we had anything like that,” says Jim Sullivan, managing director, REIT research, with BTIG.
These developments are likely to prove extremely challenging to deal with for the nation’s regional mall owners. One damage-mitigating factor as far as restaurant closings are concerned is that mall restaurant tenants tend to be national chains with better credit profiles, according to Vince Tibone, senior analyst with the retail team at Newport Beach, Calif.-based research firm Green Street Advisors. And some may be strong enough financially to be able to weather a temporary fall in business, notes Sullivan. Still, between the widespread closings and falling customer traffic, restaurant sales “are likely to plummet in the current environment,” Tibone says.
To keep them from filing for bankruptcy, it’s likely regional mall owners will have to renegotiate their rent arrangements, and the same may have to be done for many retail tenants. “We just don’t know what the economic impact will be, whether the tenants will still be required to pay rent, how much rent forgiveness will be out there, whether retailers’ insurance providers will be obligated to cover for the lost rent—it’s still an open question,” according to Tibone. One thing that is for certain is that the mall REITs shareholders won’t be thrilled about rent forgiveness without the government providing some kind of a backstop for the landlords themselves, adds Sullivan.
Regional mall and outlet center REIT stocks were hit especially hard amid broader stock market carnage on Monday. For the most part, mall REIT stocks had losses far pacing the overall market. The Dow Jones Industrial Average fell 12.93 percent in trading Monday, off almost 3,000 points to 20,188.52. Among mall REITs, Simon Property Group’s shares fell 26.68 percent to $65.79 per share. Tanger Factor Outlets lost 26.63 percent to $6.57 per share. Macerich Co. fell 27.85 percent to $9.69 per share. Taubman Centers stock fell 13.28 percent to $41.72 per share. Meanwhile PREIT fell 11.39 percent to $1.40 per share and CBL & Associates Properties saw its stock fall 10.08 percent to $0.44 per share.
What the ultimate impact will be on the regional mall owners and in the regional mall REITs is currently hard to foretell. Among the REIT owners, only Simon Property Group’s balance sheet looks strong enough to withstand that kind of massive hit to its fundamentals. The other mall REITs’ leverage is “now becoming a big concern in the public markets.”
Simon, in fact, on Monday extended its existing $4.0 billion senior unsecured multi-currency revolving credit facility, with a $6.0 billion senior unsecured credit facility comprised of a $4.0 billion multi-currency revolving credit facility and a $2.0 billion delayed draw term loan facility. The revolving facility will mature on June 30, 2024, and the term facility will mature on June 30, 2022.
"The newly refinanced $6.0 billion credit facility and term loan enhances our already strong financial flexibility, and when combined with our existing $3.5 billion senior unsecured credit facility provides us with $9.5 billion of total credit capacity. The closing of this facility is a continued endorsement and reaffirmation of the strength of our Company," Simon Chairman, CEO and President David Simon said in a statement.
For that reason, BTIG researchers feel that REITs that are highly exposed to the decline in consumer spending right now, including mall REITs as well as hotel REITs, should suspend paying their dividends to preserve their cash, according to Sullivan. Macerich has already announced it was cutting back its dividend by 33 percent.
“This is ultimately going to challenge the entire industry and the entire industry is going to have to decide whether its is appropriate to suspend their dividends until this is over,” he notes.