Home Featured Barclays Looks at US Retail REITs for ICSC’s RECon 2017

Barclays Looks at US Retail REITs for ICSC’s RECon 2017

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Malls and shopping centers have been the two worst performing property types in the RMZ due to the record number of retail store closures in 2017. That is according to a recent report from Barclays. “YTD, malls are down -15.9% and shopping centers down -21.5% versus the RMZ -2.4% and S&P 500 +7.2% (as of 5/16/17).

The underperformance, Barclays says, reflects the deep skepticism investors have surrounding the viability of retail real estate. “Our view is that the owners of the highest quality real estate will experience temporary dislocation from department and retail stores closures, but will ultimately survive and have more productive portfolios in this process of culling back underperforming retailers.”

With that said, in the near-to-medium term, the firm says that negative headlines are likely to persist creating formidable headwinds from an investing perspective.

Barclays is currently attending ICSC’s RECon 2017 in Las Vegas, the industry’s annual convention where tenants and mall and shopping center landlords network and discuss industry trends and leading plans. The firm is hosting investor meetings and the following are some key questions the company plans to ask of its enclosed mall and open air shopping centers companies under its REIT coverage.

Questions for Malls:

  1. With apparel comprising ~50% of the merchandise mix and the expectation that this will decline significantly over the next several years, in your view, what characteristics will the winners (in apparel) have in order to survive?
  2. With restaurant and entertainment expected to occupy a higher percentage of square footage, how do you expect to merchandise food courts? Which category do you want more of:  quick service, casual dining or fast casual? Will these chains look to expand or relocate to your malls? Why will they choose a mall over other property types (e.g. rent, traffic).  What are the top restaurants you seek at your properties?
  3. What sort of entertainment options do you envision in your malls? Are there any that aren’t currently at malls, but might work as differentiated traffic driver? When you look at international malls, are there any that you view as a paradigm?
  4. On Macy’s 1Q17 earnings call, management said they are working more closely with mall developers to help drive traffic. Can you give us a sense of what these initiatives might look like?
  5. In the past, mall owners have talked about how shoppers use their phones to do research before going into the stores.  How is this behavior is evolving?
  6. Average rents seem at risk to decline over time as square footage from inline shops are replaced with restaurants – is there an offset to this?
  7. How would a potential Sears bankruptcy filing impact your business?

Questions for Shopping Centers:

  1. For grocers that have a buy online and pick up in store service option, are you seeing any notable differences in the productivity of those stores versus others?
  2. With store closures having accelerated in 2017 (e.g. more vacancies available), how are discounters weighing the decision to open up in an open air center versus an enclosed mall?

Both Property Types:

  1. Is the trend of consumers dining out more cyclical or secular?
  2. Food spend is viewed historically as not competing with wallet spend for other goods/services at a property? That said, it’s not necessarily a given that people go shopping before or after they dine.  What can property owners do to encourage more spending at the property?
  3. How do restaurant rents compare in open air centers versus malls?
  4. What’s the best strategy right now to deal with underperforming malls/shopping centers? Privately market them? Put them on the open market? What is the appetite and who are the buyers?
  5. Given the steep discounts at which your stocks are trading to NAV, are you allocating more of your free cash to stock buybacks relative to your development/redevelopment plans?
  6. 2015 was supposed to be a record year of closures, but 2017 has surpassed this. What happened? Will store closures slow in 2018 versus 2017? If more apparel stores are going away, what will a “normalized” store closure cycle look like? Besides waiting to close until after 4Q (holidays), will there be a cadence to the store closing cycle?

TheReitWire.com will follow up with Barclay’s account after the ICSC RECon show wraps up on Wednesday. Stay tuned for more from the retail REIT sector.