The American shopping mall is dead, right?
I mean, ask anybody: Amazon.com Inc. and Wal-Mart Stores Inc. beat the mall to death, and there is no coming back.
No one goes to the mall, and they never will again, and all the real estate investment trusts (REITs) that own malls and shopping centers are going to zero.
Zilch. Nada. Goose egg. Worthless.
At first, this, the conventional wisdom, makes a lot of sense - to me and every other investor.
After all, no one in my house went anywhere near a mall this holiday season. What shopping we did, we did online.
Why go to the mall and put up with all that traffic and the crowds?
Well, as it happens, while everyone has been declaring the mall dead and listing all the ways they'll never set foot in another one, a very specific kind of mall has been reinventing itself - and successfully, to boot.
In fact, I think it's the most unreasonably profitable investment on the market, in part because no one's looking at it.[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
"They" Aren't Looking at the Right Malls
Turns out there were traffic and crowds at the malls this holiday season.
Not all malls, of course, but malls that can be considered "A" properties aren't seeing much decline at all.
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Now, I'm not saying Alibaba and Amazon are going to get a run for their money or anything, but there is definitely ample room in the market for these places.
Hear me out...
The very best malls have been out in front of the e-commerce trend and have been repurposing as "destinations" where you can just so happen to do lots of shopping.
These best-in-class malls are starting to attract some serious attention from some unreasonably wealthy types who can move markets at a whim. I mean long-term and activist investors who are convinced some of the retail REITs are dramatically underpriced.
One of the more interesting activist campaigns involves Jonathan Litt of Land and Buildings Management and Taubman Centers Inc. (NYSE: TCO).
I've followed Mr. Litt and his activist campaigns against REITs for years now, because he is like a pit bull with T-bone when he gets hold of a company. In the classic activist style, he sends letters to management advocating for the sale or changes that he thinks will increase shareholder value.
Taubman owns 23 urban and suburban shopping centers in 11 states. Most of its centers are in metropolitan areas like New York City, Los Angeles, San Francisco, Denver, Phoenix, Miami, Dallas, Tampa, Orlando, and Washington, D.C., that have strong local economies and an affluent metro demographic.
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Litt estimates that Taubman's portfolio of Class-A malls is worth $106 a share. That's well above its current (as of Dec. 21) price of $63, but Litt's conviction holds that entrenched management and poor operations have kept the stock from trading at fair value.
Land and Buildings lost a proxy fight earlier this year, but Litt's not going away. He has some company this time, too: Elliott Management's Paul Singer has joined the fray, and he's calling for the company to be sold to unlock the value of the real estate holdings.
Shares of Taubman have been moving higher as the fight intensifies, but there would appear to be a lot of upside left with this REIT.
Like I said, Litt has suggested $106 as the full value. Mike Kirby, the Director of Research at Green Street Advisors, said in Barron's recently that it would take $85 to $90 to get a deal done.
That's anywhere from 24% to 68% more than the current share price. I like that. A lot.
Jonathan Litt and Paul Singer are not the only wildly successful investors who think that mall properties are unreasonably cheap in the current pessimistic environment.
Brookfield Property Partners LP (Nasdaq: BPY) has made an offer to acquire the 66% of mall operator General Growth Properties - now trading as GGP Inc. (NYSE: GGP) - it doesn't already own.
General Growth has turned down the first offer of $23 a share, but I suspect there is another offer on the way.
In a recent conference call, Brookfield executives estimate the GGP has a net asset value of about $30 a share. I suspect the final price will be closer to that number than the current price.
Brookfield CEO Brian Kingstone thinks that buying malls on the cheap and repurposing the property is a significant opportunity.
In his most recent shareholder letter, Kingstone said, "We believe that acquiring big-box anchors in our malls and repositioning them is the single greatest growth opportunity in retail today. We have repositioned over 100 anchors and have no anchor vacancy in our portfolio. And given the fact that traditional large-format department stores pay minimal rent, these parcels can be re-let to higher revenue-generating uses including grocery stores, restaurants, fitness centers, theaters and other entertainment-driven venues. On average, these redevelopments yield 8-10% returns on cost and up to 20% returns on capital."
Are malls changing? Yes, they are. Department store anchors are no longer the key to success for mall properties. The mall my new granddaughter and her friends will want to frequent as teenagers on weekends will look a lot different from the malls my 14-year-old wishes we would let her hang out in every weekend now.
I Can Even See Profit Potential in the Dead and Dying Malls
Class A malls will be fine. They tend to have destination stores like The Apple Store, Sephora, Ulta Salon, Michael Kors, Rolex, Disney Stores, and high-end jeweler and apparel shops. They usually have entertainment complexes with theatres and dining options.
They may not be as department-store-focused as in years past, but they will quickly fill the space, possibly even at higher rates than anchor tenants usually pay.
If you see any sustained selling in the high-end mall REITs like Simon Property Group Inc. (NYSE: SPG) or Macerich Co. (NYSE: MAC), they may be strong candidates for long-term ownership that delivers high returns.
The two takeover plays, General Growth and Taubman, look buyable at current levels, as I think both will be sold at premium prices before the end of 2018.
Of course, the conventional wisdom's not entirely wrong. There are losers here...
Are malls in lower-income and less-urban areas in trouble? Yes, they are.
Class B malls are probably not going to make it. However, smart operators will buy the property on the cheap and repurpose it. I have seen malls turned into apartments, senior housing, churches, and athletic centers - a variety of other, lucrative uses since the "Death Spiral of the American Shopping Mall" narrative began.
Several Class Bs will probably go out of business or liquidate. The important thing to consider when looking at REITs with Class B malls is to ignore the mall operations and focus on the real estate value and potential for profitable repurposing. Identifying Class B mall REITs that can be purchased for less than the real estate value - real estate which can then be either repurposed or liquidated - should lead to huge gains for aggressive, but patient, investors.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.