We have way too many stores.
The numbers from all the major retailers in the malls are disastrous. I can't find a single mall store doing better than last year. Many are down high-single digits. We are clearly overstored and some retailers, like Sears Holdings (SHLD), at this point, have no reason for being.
We have had a number of bankruptcies in the last year: Anna's Linen's, A&P, PacSun, Quiksilver, REI and Sports Authority. These are not small outfits. They are nationwide chains with stores in many different centers.
Yet last week Kimco (KIM) and Simon Property (SPG), the largest strip mall operator and the largest shopping mall owner hit 52-week highs and Federal Realty (FRT) -- the largest shopping center -- and Tanger Factory Outlet Center (SKT), are just points off their 52-week highs.
Kimco, the strip center, where these bankruptcies have impacted heaviest, is up 11%, Tanger's up 10% and Simon and Federal are both up 8%.
These have been among the strongest performers in the entire stock market. They are also outperforming the real estate investment trust index, which is up about 6% for the year.
Not only that, but the quarters just reported were among the strongest I have seen in these companies' histories. Their dividend growth is superior to most publicly traded companies.
You could argue that I am picking the best of the best. But even the shopping-related REIT that I consider having the worst fundamentals and an accounting issue involving smoothing of earnings that caused the resignation of some top executives several months ago is still up for the year.
How is this possible? How can the REITs that encompass stories be as strong as they are despite the omnichannel, despite the 27% increase in the retail business of Amazon (AMZN), despite these myriad of bankruptcies.
There are multiple reasons why their earnings per share could be so robust even as so many have bet against these and have failed. In fact, the short positions are a bit lower than the average stock in large part because they have rolled over shorts with very-high-quality earnings.
First, it is scarcity. When you talk about construction returning to this country you are really speaking of non-residential construction of office buildings and apartments, not strip malls, outlet centers, shopping centers or shopping malls, except by these companies and these companies are about as prudent as it gets when it comes to expanding. Their balance sheets have reasonable amounts of debt and the coverage is strong for all of them. When a vacancy occurs, typically only because of one of these bankruptcies, it is usually good news because they can raise the rent to the next tenant. Sure, at times they have to put more money into repurpose stores. The A&Ps, in particular, are simply not able to be rolled into another supermarket given their rundown nature.
Still, rents have gone up consistently, so when a long-term tenant like a supermarket goes belly-up, the space can be rented at such a higher price that earnings tend to go higher almost immediately. That's what a lack of new building can do. Demand greatly exceeds supply.
Second, these companies also have knack for real-estate opportunities. Tanger has been putting up new centers near all of the great shore resorts as natural places to go in inclement weather. Simon and Federal only make moves in the most urban and trafficked areas. With all of these it's location, location, location.
Third, when real estate loses luster the mall doesn't necessarily need to be packed with more stores. Federal, for example, has exploited its properties for high-quality real-estate opportunities. It's gigantic The Assembly Row project in the Boston area has been a perfect example of mixed use.
Finally, retail itself has been able to adapt to the new world. Pet stories, IMAX (IMAX) movie theatres, restaurants and chain stores like those of TJX (TJX) and Ross (ROST) are still expanding and need more locations. Their bargain-basement prices often undercut those of Amazon.
So, while it's perfectly natural to think that these stocks would be ideal shorts in this environment, given all of these positives, all I can say is, think again.
