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Are Mall REITs at the Early Stages of a Material Rebound in Relative Performance?

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A recent research report from BTIG said that the substantial rally in mall REIT share prices over the last week echoes the reversal in the relative sector performance that we have experienced in 2000 at the onset of the so-called “tech wreck.”

According to firm analyst James Sullivan, “We have been arguing for several months that Mall REIT fundamentals have been healthy in spite of the significant relative underperformance of Mall REIT share prices.”

Sullivan says that the mall sector has rebounded materially since the beginning of last week, which was the eve of the NAREIT Investor conference in New York that began on June 6. He notes that the relative underperformance occurred in spite of relatively strong fundamentals reported by Mall REITs over that period.

But he explained that we had seen this before. As was the case in 1999, Mall REITs have materially underperformed not just the tech companies, such as Amazon that are most identified with e-commerce, but the rest of the Equity REIT universe, Sullivan said. But as was the case in 2000, we may be seeing the early stages of a substantial reversal in relative performance, he explains in the report.

As retailer bankruptcies and store closing announcements have increased sharply since mid-year 2016, Mall REIT share prices collapsed although their operating metrics have remained stable to very positive, the report says.

But what is unclear and controversial, “is whether traditional brick and mortar retailers can adapt and take advantage of the channel successfully or become victims of the growth of the channel. And for those retailers that cannot maintain sale volumes in this environment and are forced to close stores, the question becomes the ability of mall owners to replace those retailers with other retailers in the same merchandise category or retailers in new merchandise and/or service categories,” Sullivan explains.

Sullivan points out that when his company reviewed REIT performance in its Q1 2017 earnings season, performance was respectable in the retail REIT sector through mid-May. However, he adds that their relative share price performance was very weak and reflected the negative sentiment toward retail in contrast to its operating performance.

But he adds that mall owners have done well overall since 2000 and notes that “we should expect a very positive rebound in Mall REIT performance relative to the rest of the Equity REIT sector.”