Hasn't Destroyed Shopping Malls Yet

"Bricks and mortar is at the core of an omni-channel world." -- CEO Sandeep Mathrani, General Growth Properties, at the June 2014 REITWeek presentation.

The mall is dead, or long live the mall? In a world dominated by e-commerce, how can malls survive, or even thrive? Actually, e-commerce along with catalogue and direct mail only makes up less than 9% of total retail sales. Is that a lot or a little?

Well, to put that into perspective, back in 1995 catalog and direct mail sales accounted for about 10% of retail sales according to General Growth Properties CEO Sandeep Mathrani. He also observed that looking back just five years ago, e-commerce as a percentage of bricks and mortar sales was almost non-existent.

Today, he estimates approximately 50% of e-commerce sales can be attributed to bricks and mortar retailers. That is a significant rate of growth!

During the past five years, net sales have steadily increased from $24.5 billion to almost $75 billion in 2013. However, net income has swung from a high of $1.4 billion in 2010, to a loss of $39 million in 2012, with $274 million being reported for 2013.

Will high rates of growth lead to earnings and profits for the Amazon business model? Only time will tell. Amazon currently trades at a P/E of 510, which translates into a massive $150 billion market cap.

Show me the money
During the past five years, Mr. Market has basically given Amazon CEO Jeff Bezos a free-pass when it comes to traditional metrics. Meanwhile, General Growth Properties was forced to file for bankruptcy in 2009 with about $28 billion in assets and ~$25 billion in debt that it was unable to refinance. So there is absolutely no way that General Growth Properties stockholders could be happier than Amazon investors, right?

How was this possible?
Shrewd Wall Street investors swooped in and scooped up General Growth common stock as early as 2008.

Bill Ackman, founder and CEO of Pershing Square Capital Management bought $60 million of stock at prices as low as $0.35 per share. Brookfield Asset Management, bought a significant stake as well, as did Blackstone Group along with Fairholme Funds, Smart money was betting on an economic recovery helping bricks and mortar retailing -- specifically assets owned by General Growth Properties.

From bankruptcy to a well-managed balance sheet
Among the many challenges facing General Growth management was rebuilding a solid balance sheet and getting back on course paying and increasing dividends to shareholders. In a relatively short period of time, the management team has succeeded in doing just that:

Supply and demand for General Growth properties

  • The majority of the General Growth expansion pipeline is essentially 100% pre-leased, making them more like build-to-suit projects. The one notable exception is the 600,000 square foot expansion of the crown jewel Ala Moana Center in Hawaii, which is 70% pre-leased.
  • In 2011, General Growth faced the challenge of 77 vacant department stores. General Growth bought back 14 locations (11 from Sears) and has leased out the anchor spaces to upscale retailers like Nordstrom, and Dillard's. Fast forward to 2014, and there are only 3 vacant big box opportunities remaining.
  • General Growth sold 47 malls in the last three years; the company is currently pleased with its 120 remaining malls -- with 87% of sales coming from 94 A and B+ malls.

How about the rest of this sector?
Are shares of the other landlords that own U.S. shopping malls dead money? Nope. In fact they are performing quite nicely so far in 2014. Here is the big picture:

Why high quality malls are thriving
CEO Mathrani's REITWeek presentation points out a multitude of reasons why well located U.S. shopping malls can be a great business moving forward:

  • There currently are only 1,100 malls, down from 2,100 only 20 years ago.
  • Perhaps only one new mall per year will be constructed for the next 10 years -- resulting in a net decrease, due to the closing of obsolete malls.
  • A healthy fear for e-commerce competition has resulted in malls upgrading the overall customer experience.
  • The main competition for these malls are other types of centers: lifestyle, outlet, power, and specialty retail. In 2013 Apple, did $18 billion in sales from bricks and mortar stores, an example of a multi-channel sales approach.

Investor Takeaway
Malls appear to be spearheading the charge of bricks and mortar retailers fighting back against threats from e-commerce juggernaut Bricks and clicks now account for 50% of online sales. Goods can be shipped directly from warehouses to consumers or alternatively, "ship-to-store" allows shoppers to take advantage of in-store promotions, and convenient returns.

Mall landlords have even partnered with Deliv, a same day package delivery concept for mall-based stores, to place added pressure on Amazon. The real question seems to be whom really has the edge in multi-channel sales? This appears to be a fight that is still way too close to call.

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The article Hasn't Destroyed Shopping Malls Yet originally appeared on

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