The mass closures of stores at shopping malls nationwide have sent investors heading for the exits, pushing mall REITs​, also known as retail REITs, down by 20% over the past seven months, according to Barron's. By contrast, the S&P 500 Index (SPX) has gained 7.9% from its August 26 close to through Tuesday's open of trading.

Don't Touch These

Analyst Floris van Dijkum of asset management and investment banking firm Boenning & Scattergood told Barron's that mall REITs typically outperform other real estate investments in rising interest rate environments and that "mall investors with a two-year horizon will be rewarded handsomely."

That horizon may be too long for many investors.

Even van Dijkum says that three mall REITs in particular should be avoided. Tanger Factory Outlet Centers Inc. (SKT) currently has a price-earnings ratio (P/E) of 16, which he finds too rich. CBL & Associates Properties Inc. (CBL) has excessive exposure to low-quality malls. He also could have added that it has a P/E in excess of 15.

Seritage Growth Properties (SRG) has negative net income, trades at a premium to net asset value, and is tied closely to the fate of Sears Holdings Corp. (SHLD), which warns in a recent SEC filing that its prospects for further existence are diminishing, per Barron's. Seritage is a spinoff from Sears that has 254 of its 260 locations anchored by a Sears store, and its future prospects thus hinge on being able to redevelop these locations profitably.

 

Michael Shaoul, CEO of Marketfield Asset Management, told Barron's that he's more inclined to view the current pullback in mall REITs as a "period of recognition" during which investors identify a key vulnerability in an industry group, rather than as a buying opportunity. He fears that all the bad news has yet to play out.

Possible Death Spiral

Investopedia spoke to Rose Klimovich, who teaches fashion marketing and entrepreneurship at Manhattan College in New York City, who notes that bricks and mortar stores are losing sales at an accelerating pace. This results in the closing of stores, with prominent mall tenants such as Macy's Inc. (M) and Gap Inc. (GPS) being prime examples. Most notable among the growing list of mall-centric clothing retailers going completely online is privately-owned The Limited, which is closing all 250 of its stores, according to Fortune. Another familiar presence in malls, video game seller GameStop Corp. (GME), is shuttering 150 or more locations, Barron's says.

Luxury Winners

The exception to this trend, Klimovich notes, is the case of high-end luxury malls whose tenants generally cater to an upscale, rather than a mass market, customer base. These malls appear to be holding their own, at least for now. Klimovich would only consider buying real estate or REITs holding high-end malls with prime locations, and suggests that the future impact of closings by major tenants such as Macy's has yet to be fully grasped.

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