Shopping: Analyst seeing 'sales at the dominant malls higher than 2019 levels'

BofA Global Research U.S. REITs Head Jeffrey Spector details what he is seeing in real estate investment trusts' trends as mall retailers are experiencing a shopping boom headed into the holiday season.

Video transcript

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JARED BLIKRE: Death of the mall? Don't say that this holiday season because malls are bumping. In fact, real estate investment trusts, that sector is the third best performing sector in the S&P 500, up 33% year to date. And we want to talk about the mall with Jeffrey Spector. He is a Bank of America head of REITs.

And let's just talk about this boom that we've had here. I mean, I guess you can tie a number of factors into it but the consumer is here. We saw the personal spending numbers from this morning. Just give us an overview of the state of the mall right now.

JEFFREY SPECTOR: Absolutely. And thank you very much for having me on today. Yeah, the malls have had a tremendous comeback. I'd say retail REITs have had a tremendous comeback. We wrote earlier in the year that the retail sector is the comeback kid in real estate.

Traffic is back to '19 levels. We are seeing sales at the dominant malls higher than 2019 levels. And really a key focus, most important is the retailers, the retailers focusing on the best brick and mortar at dominant top malls or shopping centers in the United States as they roll out omnichannel efforts, buy online, pick up in-store, and curbside pickup.

JARED BLIKRE: And I'm just wondering, we saw a number of measures in the heat of the pandemic mainly last year, to try and give people breaks on their rents, and I'm just wondering if we are past that point right now? If the retailers are able to pay their bills and if they're getting paid as well?

JEFFREY SPECTOR: Collections are really back to normal. You know, there are still select issues I'd say but the public retail REITs play again and own more of the dominant centers in the best markets in the United States, so the collection issue is in the past. That's evidenced by say the distribution or dividend REITs, which have not only stabilized but are increasing at a really nice pace right now.

AKIKO FUJITA: Jeffrey, I'm thinking back to conversations we had really when so many of these stores were still closed about you know, what the future of malls are going to look like, especially in these spaces where department stores had already exited. How do you think the mall experience has evolved over the last two years or so? I mean, are we seeing shoppers sort of return to the same expectations or is there a different experience that we're now seeing there?

JEFFREY SPECTOR: So the malls are trying to deliver the ultimate shopping experience. Pre-pandemic we were favoring the malls, they were in a good position again with retailers' focus on those omnichannel efforts. The malls were doing a good job replacing weaker department stores with other tenants.

I'd say we're starting that stage again. The best thing for the malls is that people now want to experience shopping, they're going to the mall. I don't know if you've recently visited your mall or a premium outlet center, let's say in the United States, the parking lots are full. So people are experiencing the mall.

We also cover the single-family rental space, which is booming. Millennials have been leaving cities. Just like their parents, they're going to the suburbs, which is a catalyst for the malls. And they're going to the mall to shop. So right now, the malls are in good shape or better shape I should say. And you know, as long as they can keep those millennials, the older millennials, the shoppers interested in the experience, keep replacing those anchors, they'll be much better positioned going forward.

JARED BLIKRE: And I want to ask you about one mall operator, in particular, that's Simon Property Group. And I'm looking at their stock, it's up 96% year to date, so basically doubled. And this is a story about execution, it helps to have some tailwinds, of course, a booming economy and whatnot but can you speak as to some of the things that are helping Simon Property Group execute right now?

JEFFREY SPECTOR: Absolutely. So I mean, Simon is an owner of what we define as more dominant retail centers in the United States. At BofA, we have our own proprietary analysis, and approximately 90% of their malls are more of those dominant malls where retailers again, are focused on maintaining brick and mortar presence and so Simon is you know, improving, occupancy was up this past quarter.

As I mentioned, sales are higher, in particular, at their more luxury fashion malls versus 2019. And what we're excited about is their redevelopment pipeline. This was a major catalyst and boost to the value of their centers pre-COVID. The redevelopment pipeline has restarted. That is again, Simon investing money into redeveloping the weaker anchors and replacing them with stronger ones.

That program now is back to close to $1 billion, it's self-funded through free cash flow. So to us, it's an incredible way to use that cash flow at approximately 6% cash on cash returns. Additionally, I'd say some of the other--

AKIKO FUJITA: Jeffrey--

JEFFREY SPECTOR: Please, I'm sorry.

AKIKO FUJITA: No, just finish your thought.

JEFFREY SPECTOR: I was just going to say, the other catalyst you know, we're focused on here is international tourism. Many of Simon's centers do cater to the international tourist. And then again the migration to the suburbs, which we expect to continue over the next 10-plus years.

AKIKO FUJITA: Well, I have to admit, I've kind of been avoiding the malls because of the crowds there. But it's nice to see the traffic returning after the year they had last year. Jeffrey Spector, BofA Global Research US REITs head. Appreciate you joining us today.