When you go to the mall to buy a pack of batteries from
, neighboring shops hope you'll pop in for sunglasses, T-shirts
or baked cookies. That was the notion that inspired Victor Gruen,
who designed the first fully enclosed shopping mall in the 1950s.
(The Southdale Mall, in Edina, Minnesota, is still in use
Gruen understood that by grouping shops together in one
central place, each store would benefit from what's known as a
network effect. Today, that network is unraveling, potentially
threatening the entire shopping mall concept.
RadioShack, for example, is in the process of closing 1,000
stores, many of them in malls. Countless impulse buyers, in
search of the company's products, have one less reason to go to
the mall, and as a result, neighboring retailers will see reduced
We're not just talking about the loss of a store here and
there. According to a recent tally by USA Today, thousands of
stores are set to close over the next few years.
The important names in this group are
Barnes & Noble (NYSE:
J.C. Penney (NYSE:
Sears Holdings (Nasdaq:
and Toys 'R Us. These are known as anchor tenants, operating
big-box stores that act as powerful magnets for shoppers. A
number of malls across the U.S. have lost not one but several
anchor tenants. Those are the malls that are now characterized by
eerily quiet foot traffic -- and an employee count across the
mall that can sometimes outnumber the customer count.
When a sufficient number of stores close, the massive level of
expenses needed to operate a mall start to become untenable.
Green Street Advisors, which analyzes the industry, predicted in
2012, that 10% of all malls would need to close over the coming
decade. By early 2014, they had revised that figure to 15%, and
the number may move higher still: Many of those store closures
noted in the table above were made after Green Street revised
With this backdrop in place, it's time to scrub any exposure
to shopping malls from your portfolio. And many investors
unwittingly have such exposure when they buy real estate
investment trust (REIT) mutual funds and exchange-traded funds
(ETFs). Remarkably, many of these mall REITS trade near all-time
highs, and the steady stream of store closures has yet to impact
These mall REITs appear to offer decent dividend yields, and
many of them boosted their dividends at as solid pace in 2013.
Yet the rapidly deteriorating economics of shopping malls
suggests that dividend growth in the future is likely to slow
sharply, and in some instances, dividend cuts may be the future
path. That happened in 2013 at
Glimcher Realty Trust (NYSE:
, and many other mall REITs already apply nearly 100% of their
cash flow to dividends.
Despite once being a powerful anchor tenant, J.C.
Penney now plans on closing 33 stores, with more to
As we've noted over the past year, the path ahead for dividend
investors is to seek out companies capable of solid dividend
growth, and not necessarily solid current dividend yields.
Indeed, with interest rates
seemingly poised to rise in coming quarters
, these mall REITs, with their likely slow or negative rate of
dividend growth, could prove to be especially vulnerable.
To be sure, some malls are better than others. Newer
properties that host some of the most appealing retailers will
fare a lot better in the coming shakeout than those malls that
are perceived as dowdy or unappealing by consumers.
Merrill Lynch took a look at the mall REITs and ranked the
industry from best to worst, in terms of the relative appeal of
their malls' financial health, demographic appeal, quality of
anchor tenants and market positioning.
Those analysts concluded that the U.S. properties owned by
Australia's Westfield Group (
Taubman Centers (NYSE:
stand out as industry winners. Bringing up the rear:
CBL & Associates (NYSE:
and newly public
Washington Prime Group (NYSE:
, a set of malls carved out of the portfolio of
Simon Property Group (NYSE:
Wondering which mall REITs have a lot of exposure to
struggling anchor tenants such as J.C. Penney and Sears Holding?
General Growth Properties (NYSE:
(those two are 40% of all anchor tenants) and Simon Property
Another ominous sign: When anchor tenants have vacated, a pair
of retailers have tended to pick up the slack: "
Dick's Sporting Goods (NYSE:
has been one of the most active retailers leasing vacant anchor
space, with 94 anchor stores in these mall portfolios, up from 76
two years ago.
also has been taking empty anchor space, and currently occupies
51 anchor locations at these REIT portfolios," note Merrill's
Notably, both of these retailers have experienced their own
headwinds recently. For mall REITs, the hits keep on coming.
Risks to Consider:
As an upside risk, the slowly improving mood among consumers
could help to stem further traffic declines at malls.
Action to Take -->
This isn't an indictment of retail stocks. Many of them appear to
be taking the tough steps to regain fiscal health, and their
share prices already reflect tough times, unlike mall REITs,
which trade as though there were no storms overhead. If you have
had a great run with these stocks over the past five years, the
macro retail environment, coupled with rising rate environment,
suggests it is time to book profits.