Deidre Woollard: In this hour we're going to talk about retail and travel, and reopening in general because right now I feel like there's this kind of frenzy happening. It's been really happening for a month or two, but everyone wants to go on vacation, everybody wants to go do stuff. It's an interesting time to talk about retail. Is retail going to shift? Is all that money that was sort of flowing toward retail going to shift towards travel? Lots to talk about. Go ahead and throw your questions into Slido and we will definitely try to answer all of those. But I want to start with this poll that our friend Dan Kline posted on Twitter last week about if 25 percent of retail would be e-commerce by 2025. A lot of people voted on this, a lot of controversy. Eighty-eight percent of those he surveyed voted yes, including me. But actually, I think that sometimes e-commerce gets over hyped a bit. What do you think?
Matt Frankel: Yeah. The Census Bureau does a really good job at keeping track of this quarter-after-quarter. The current statistic is about 13.5 percent of all retail is on e-commerce. A lot of people don't realize just how much is still going on in physical retail and how much will continue to. I think we might eventually get to 25 percent, it's not going to happen by 2025. The current trajectory is pointing toward about 18 percent. It's pretty much been a steady climb since over 10 years ago. I want to say e-commerce was about five percent of retail sales in 2010 and it's really been very steady. There was a spike due to the pandemic, but it's generally been really steady. Even Amazon is opening physical retail stores because they realize that there's only so much you can convert to e-commerce. I don't think that e-commerce is necessarily the wave of the future, I think omnichannel retail is the wave of the future. I mean, yesterday I bought this mouse yesterday and I got it from Best Buy and it was delivered to my house in two hours. The only way that those delivery times are possible, is if there's a physical location nearby that they can deliver from. They essentially use like an Uber for delivery, where somebody goes to Best Buy picks up the mouse and brings it to my house. It's really going to be an omnichannel market rather than an e-commerce market going forward, which I think omnichannel is going to be the big winner and that's really why I don't think you're going to see that 25 percent number within the next five years.
Deidre Woollard: Well, yes. Where does something like BOPIS or curbside pickup fall in e-commerce? Is that e-commerce if you are still going to the physical store but you're buying it online?
Matt Frankel: Yeah, that's what a lot of the gray area is. Do you really consider that e-commerce? The mouse I bought from my local Best Buy that just happened to be delivered to my house, is that considered e-commerce because it definitely came from a physical store, not a warehouse. There's a lot of gray area there and I think the lines are going to get even more blurry as we go on. Curbside is definitely here to stay. People realize that that's a big convenience. A lot of retailers were forced to pivot to that during the COVID pandemic. It was not a smooth transition at first, a lot of retailers did not get curbside right for a few months. [laughs] I can tell you that firsthand, but a lot of them did work out the bugs and now it's really an essential part of their business and it's something that's almost expected going forward. In my local Best Buy, I was just talking about there's an entire row of parking spots that are dedicated to carside pickup. I think they call it carside because you're not actually by the curb anymore. I think curbside is going to be a big part of retail going forward, but I really think that you're going to see physical locations just as much as ever. Obviously, some types of retail are going to pivot more online, we don't really need a physical location for. But in a lot of cases, people want things quickly which needs a physical location. People want to see things in a lot of cases before they buy. I can't buy a refrigerator online. I'm not going to because I want to see what I'm buying first because that's a big purchase. A lot of places need physical locations, but you're right, that the lines are going to get really blurred as to what exactly is e-commerce overtime.
Deidre Woollard: Well, yeah. Way before the pandemic showrooming was considered a trend where you would go and see the refrigerator and then go home and buy it online. That was a thing that was already in place too.
Matt Frankel: Retailers like Best Buy, especially, I keep mentioning them, they've done such a great job over the past decade of transforming their business. But companies like Best Buy, Home Depot, Lowe's, those types of places, really saw this showrooming thing going on and said, "Why can't we get this action? [LAUGHTER] Why can't somebody go check something out of one of our competitors and then go online and buy it from us and come pick it up." They've all done really good jobs of pivoting. If you include things like curbside and the quick home delivery, like I just mentioned, if you include all of that then I could make the case for e-commerce could be 20-25 percent by 2025, but if you count those things as physical retail, which I do, I don't think you get anywhere near that total.
Deidre Woollard: It really is hard to quantify because so many places Walmart included are trying to get you to use an app-in-stores and that's a big part of Amazon too. You've got this, it's omnichannel but it's even deeper than omnichannel because it can be multiple channels happening at once and that's even harder to figure out what that counts as.
Matt Frankel: Take Amazon's retail stores, I walk into an Amazon store and I still pay through the Amazon app, is that e-commerce? I don't live in a city that's near big enough to support an Amazon store yet, but I'm sure one is coming at some point. I wouldn't be surprised if Amazon stores become the new Starbucks at some point. Are those considered e-commerce? If I buy something on Amazon and pick it up at an Amazon store. Amazon's like the ultimate e-commerce company but better getting into physical retail. If I have groceries delivered, is that e-commerce? Someone drove to the store and got them. We shipped for groceries pretty often here, it saves me time. Is that considered a form of e-commerce even though someone's physically going there and paying it at a cash register and then bringing the groceries to my house but I paid online. What would you count that as?
Deidre Woollard: I count that as e-commerce because I tend to count it as the origination or where does the payment take place. But I'm not sure that's how everyone counts it and that's one of the things that I think is that there are so many studies coming out from so many different places with all kinds of numbers. I think trusting the census is a good place to start because otherwise when you start looking at numbers, they're just all over the place because people are counting different things.
Matt Frankel: Yeah. When you ask, what the current percentage of e-commerce is? Yeah. You're right, it depends who you ask. I've seen numbers as low as eight or nine percent, I've seen numbers as high as 20 percent. It depends on what survey you're looking at. The census bureau, I mean, I don't want to read through their methodology on gives, it's not that long of a show, it's like a big description. But they're probably the most reliable in terms of the percentage of retail sales that are actually taking place online. I think they got the COVID spike right, but I don't know. I also have trouble believing that the COVID spike was to about 18 percent, I want to say at the peak. That means 80 something percent of retail was taking place at retailers during the lockdowns. There's a lot of blurred lines in what is e-commerce and it's going to stay that way, it's only going to get more blurred.
Deidre Woollard: Absolutely. I want to bring up retail sales. They dropped 1.3 percent in May and that was a little bit bigger than a lot of analysts were expecting. Part of the reason that I've seen being given for that is that money is starting to flow back towards travel, towards services, and also the fact that we're starting to see just that little bit of inflation. I feel like the media is doing some of that scare-tactic stuff about inflation, which I always hate to see because I know it gets in people's heads. But do you think we're going to see retail sales continue to drop?
Matt Frankel: We heard yesterday from Bank of America CEO Brian Moynihan, who said that consumer spending across credit cards, debit cards, and the Zelle person-to-person system are all up 20 percent year rate from pre-COVID levels.
Deidre Woollard: Wow.
Matt Frankel: Not just from 2020, from pre-COVID levels. He also said that includes a 15 percent drop in travel spending. You're right, a lot of that spending is definitely an elevated level and has been for a few months now, but as we're going to talk about later in the show, travel volume is the highest it's been during the pandemic. We're going to start seeing a lot more of that spending. Spending is at an elevated level, but it's going to start shifting a little bit towards travel. Up until a couple of months ago, people didn't have anything to spend money on other than retail purchases.
Matt Frankel: Now everybody is just so desperate to move about the country. There were times last year I would've paid $1,000 premium just to be able to go on vacation, but we couldn't. [LAUGHTER] Now you can't and people are really starting to show in all the data.
Deidre Woollard: Yeah, it's definitely starting to show. We'll get into some of that data later. But I want to go through some of the good retail news because I think there is a lot of it. Recently, the total retail rent collections hit 90.85 percent last month, first time since March 2020, that they've been over 90 percent. That is going to give some of the retail rates a nice sigh of relief there. We are starting to see that really strong recovery, and we're starting to see a lot of just more interest in space in general. I would say, it feels weird to look for silver linings in the pandemic. But I keep coming back to this idea that malls are getting more creative, and I'm really finding it exciting because there are different direct-to-consumer brands that really built a follow-on on Instagram during the pandemic, or there's more local pop-up stuff. There seems to be more innovation. People seem to be going back to the malls, not just for the usual traditional stores, but to have an experience. All of that experiential stuff that we were talking about before the pandemic, seems to be coming back.
Matt Frankel: Yeah. Malls really took a gamble, if you will, in the past year. Traditionally if we space in a mall, you're going to sign your 5-10-year lease at a minimum.
Deidre Woollard: Right.
Matt Frankel: Malls have really embraced the 1-2-year lease structure recently. We can't get a long term tenant in place now, we can't get the rent we want now, but we're going to just take a flyer on one of these direct-to-consumer brands, for example, give them a one-year lease, see how it goes. If their sales are through the roof, they'll renew at a higher rate, sign a 5-year agreement, things like that. So far, it's really worked out. I'll mention Simon Property Group (NYSE: SPG) in particular as one that was doing a real good job of this even before the pandemic, at embracing direct-to-consumer brands. Because the idea is, you can't get those anywhere other than online. It's an experience to be able to see these things in person. A lot of people want to see their clothes before they buy. I'm one of those people. I need to make sure things fit. But malls have done a really good job of creating experiences in general. The malls also survived. We'll talk about one in a little bit that didn't. [LAUGHTER]
Deidre Woollard: Is it that they didn't survive? There is hope there.
Matt Frankel: That's true. That's fair. The stockholders didn't. We'll talk about one that didn't really work out. But the malls that have been the most successful are the ones that really have pivoted to experiences rather than just traditional retail. If Simon's are doing a great job at this, but they're not alone now. A lot of malls are bringing in these direct-to-consumer brands and finding innovative ways to fill spaces like with co-working spaces. A lot of malls are putting hotels right attached to the mall, to bring in business. Entertainment venues are being incorporated into malls themselves. A lot of old Sears properties, for example, are being turned into entertainment spaces and restaurants you normally wouldn't see in there. They're not the food court. Restaurants you normally wouldn't see in a mall are really being incorporated into these shopping malls and it's paying off so far.
Deidre Woollard: I believe we have a store in millionacres.com about one of the Sears that's been turned into a food hall-like dining experience. Like an Italy, but not quite like that.
Matt Frankel: Yeah. That's just one example. There's a whole company, Seritage Growth Properties, their whole business model is transforming Sears into different things. There was one Sears that they transformed into a total line of Dave and Buster's into restaurants. What do you think of what's the better use of space?
Deidre Woollard: If at all you live right there.
Matt Frankel: What's the better use of spaces? Sears or all that stuff? It's a no-brainer.
Deidre Woollard: Well, another thing I want to talk about because I keep thinking about this, is some of the different things that are happening with retail that will then have an impact on space. We talked a little bit about e-commerce. I think one thing I'm wondering, is mobile commerce separate from e-commerce? Are they the same thing? Because I feel like one of the things that the pandemic led a lot of big retailers to do is to get more serious about their apps, and a lot of their apps weren't that great before the pandemic. A lot of them are getting more serious about them. I'm even seeing the return of the QR code, which I feel like the QR code is a shorter cycle like the Cicada's, but it seemed to come back into Vogue, every once in a while. But we're starting to see the QR code in stores now that you're supposed to use the app, there's all of that happening too, which I think is really, we're starting to get to a place where that's actually useful and not just cool because it used to be the QR code wouldn't really do much. Now, it seems like we're catching up with where China has been with the QR code for a long time.
Matt Frankel: Yeah. The first time after the pandemic, when you went to a restaurant and saw a QR code in the middle of the table, were you like me and didn't really know what to do at first?
Deidre Woollard: Yeah.
Matt Frankel: Now they're everywhere. Now, we've really learned that technology as you alluded to. Generally, I consider mobile commerce to be e-commerce. But then that's another example of what I was talking about, where the lines really start to get blurred. What if I'm in a store's parking lot, and I do a curbside order through its app. Is that e-commerce really? Because I'm there. I generally put it in the same basket as e-commerce, and you're right. The mobile apps have really just, I'd say, had five years of evolution in the past year.
Deidre Woollard: I want to ask you, since you also cover banking and Fintech to some extent. I'm seeing a lot of stories about after pay and other buy now, pay later programs just growing by, leaps and bounds right now. It seems like that is starting to have more and more of an impact. I'm seeing it all over various shopping sites and there's really seems to be a lot of push around that. What do you think that's doing the retail?
Matt Frankel: Well, it's definitely helping to drive sales. From the certified financial planners point-of-view, it could be a good or a bad thing.
Deidre Woollard: Yes.
Matt Frankel: It could be a useful financial tool to help budget for things you were going to pay for any way that you could easily afford to pay right now, but you might want to spread it out further. If you can get interest refinancing on something you were going to buy anyway, there's a good mathematical argument to be made in favor of using it. One of the biggest things that uses the buy now, pay later is Peloton. That's the firm's biggest client. That's how we bought our Peloton. It's upstairs. We use the firm's buy now, pay later program. It's zero percent interest. The downside is, it gets people to buy a $2,000 piece of exercise equipment that they might normally not have bought if they had to stop and think, hey, I have to pay for this. It's here to stay. It's clear. Everyone has a buy, now pay later service now. PayPal is really becoming a big competitor with this. I think they're not going to be the last ones to join the buy now, pay later party. Where it bothers me is you see it on things that are $40. Like if I'm on Amazon and buying $40 bag of dog food, it offers to let that be spread it out over three payments. Is that really needed? This is my problem with the buy now, pay later market.
Deidre Woollard: Well, I also want to ask you about another thing that I think I'm watching too, which is loyalty programs. They're coming back and they're coming back in different ways. You've got things like individual stores having them, like Macy's or something like that. Then you have things like Rakuten and also now some of the retail rates, Tanger Outlets (NYSE: SKT) and Simon, both that seem to be putting more effort toward their loyalty and rewards programs. Wondering if that is also something that's going to keep growing, and especially since it's through the app, that seems to be something that might start spraying people to use that more.
Matt Frankel: Yeah. E-commerce really did a better job, especially before the pandemic, e-commerce did a better job of incentivizing people to come back through loyalty programs. You didn't really see mall operators have their own loyalty programs, at least not that a lot of people were using. But now you're seeing like Simon and Tanger, which Simon by the way, is doing a great job of trying to convince people to come back to malls. Their latest press release on their investor relations website is, and when you get this headlight right, Bitcoin and online shopping are bad for the environment. They're not even telling you that malls are a better experience, they're getting you to say, if you shop online, you are killing the environment.
Deidre Woollard: Wow. That's a good one. That's some good marketing right there.
Matt Frankel: Yes. I encourage you to read the press release. It's a good read. But the loyalty program is another issue. Simon has always done better than its peers of treating its tenants like partners. They've had mobile gift cards for a long time, you could use at any Simon tenant. They've had mall-wide promotions where they really partner with their tenants to get people in the door. They've done a good job even before the pandemic of really treating their tenants as partners. You're seeing a lot of these mall operators really double down on their loyalty programs now to not only get people out the door and spending money, but to ensure their customers they're getting now from all this pent-up demand, stay customers. When the demand returns to a normal level, you saw demand at this level during COVID, now it's here. When it comes back to here, they want to make sure that the same customers that they're getting now are going to keep coming back.
Deidre Woollard: Yeah. I think that's a really important point because we're in summer now, but before you know it, it'll be Black Friday and they'll be all of that. I think a lot of them are hoping already for a stronger holiday season and trying to get people back in stores versus e-commerce after last year's Black Friday, I think is definitely a challenge. Related to that, I want to just read some numbers of retail returns from Nareit as of the end of May. Because I think it's an interesting story. Overall retail returns for retail rates up 31.58 percent, shopping centers up 42.86 percent, regional malls up 51.36 percent, and the freestanding retail only up 11.17 percent. That's because it was only down by 10.46 in 2020, whereas overall retail was down by 27-30 percent. Definitely, there's full on turn on retail rates that we've been seeing.
Matt Frankel: Yeah. I'm glad you brought that up because I've gotten this question several times on live shows and through e-mails and stuff like that over the past few weeks. I always talked about the retail stocks, the travel stocks, things like that. Isn't the good news priced in at this point? Because like you mentioned, the gains have been absolutely fantastic. I want to quickly share my screen if I may.
Deidre Woollard: Go for it.
Matt Frankel: Can all you see that?
Deidre Woollard: Yup.
Matt Frankel: I wrote this almost exactly a year ago. I got a lot of OK Boomer comments for articles like this a year ago when everybody else was recommending Zoom and Teladoc and things like that and I was writing about retail REITs. I want to show this for the OK Boomer crowd in a second. [laughs] But like you said, so here I basically offered a basket of five stocks that we're going to be just fine. Simon Property Group, Tanger Outlets, Realty Income, which is one of those freestanding REITs we were just talking about, EPR Properties (NYSE: EPR) and Seritage Growth Properties (NYSE: SRG). At the time, you can see in the table, these were the stock prices about a year ago when we were in the middle of the COVID crisis, no one knew whether a safe and effective vaccine was coming. No one knew if we would ever be able to safely shop in the same way again. Now you can see on the right side of your screen these are the current prices as I'm talking. Simon Property Group has more than doubled. Tanger Outlets has more than tripled Realty Income, like you said, the freestanding ones are only up by 10 percent or so. EPR Properties is up 60 percent right there and Seritage has nearly doubled since then. It's definitely a fair question when people ask, is all growth priced in already at this point? Tanger has tripled.
Deidre Woollard: Okay.
Matt Frankel: Isn't that reflective of what's going on? What I'd say to that is stocks are indicative of the best information we have at the time, other than the meme stocks which trade on their own.
Deidre Woollard: Yeah.
Matt Frankel: On other factors. At the time, we didn't know if people were going to be able to go to outlets again. Now we do. What I would say is that since about November of last year, everything having to do with the reopening has really surprised to the upside. When Pfizer's initial vaccine data came out, it was better than we thought it was going to be. When the vaccine rollout happened, it's gone faster in the US than we thought it would be. There were some experts who thought vaccines wouldn't be widely available till September so that's been better than expected. New York announced today that they were fully reopening. No one thought that would happen in June so it's really surprised people to the upside. If it continues to accelerated reopening, the economy is strong as people are expecting and then some which I think it will surprise to the upside this summer just from having been out and about. I could tell you traffic is right where it was before the pandemic.
Deidre Woollard: Oh, yeah.
Matt Frankel: It's back.
Deidre Woollard: More parking lots are full. [laughs]
Matt Frankel: The easy traffic is over, the easy commutes gone. I'd say, be careful when you say that the games are already priced in, the current situation is priced in. Whereas we know we've avoided the worst-case scenario. We know that a fair amount not enough, but a fair amount of the American population's vaccinated. We know that pretty much every major population center has now reopened or is planning to in the near future. We don't know how good everything is going to do now that everything is reopened. I guess New York just announced their reopening today fully. We don't know how that's going to translate into retail sales. We don't know how that's going to translate into towards some demand right away. If things keep surprising to the upside, there could be a lot more room for these to grow. That's really, I'll shut up now, but that's really what I would have to say about when people say, is everything priced in and it's never really a bad time. Let's say the reopening's priced in already, it's never a bad time to buy a rock-solid real estate operator. I'd argue it's really a bad time to buy Simon Property Group, for example. It's really a bad time to buy Realty Income so don't focus on the current price and the fluctuations and things like that, focus on finding good companies and then everything else will take care of itself.
Deidre Woollard: We have a question. Assuming that Simon Property Group is the number 1 mall REIT, what would you say as number 2? Would that be Tanger for you?
Matt Frankel: Yeah. If you would consider those. I guess you'd call outlet centers, malls.
Deidre Woollard: Yeah.
Matt Frankel: Well, in Simon, remember they are the biggest player in the outlet space. They're, not just malls, they are big outlet REIT, their premium outlets is much bigger than Tanger. I would've said Taubman but Simon bought it.
Deidre Woollard: Yes.
Matt Frankel: Definitely not Washington Prime.
Deidre Woollard: No. Macerich?
Matt Frankel: Yeah, maybe Macerich. There really aren't that many good options.
Deidre Woollard: Yeah.
Matt Frankel: Now I'd have to say Tanger. If we consider that a mall REIT, I would have to go with Tanger. The one that I think has the most potential, I'd probably say Seritage. I think that has the most potential. I'm not going to go into a big discussion about Seritage because we've had me do that many times in the past. But Seritage it's at sub one billion dollar company. If we knew that Seritage was going to be able to successfully redevelop all of its properties, if we knew that, it would be a five billion dollar stock, we don't know that. It's probably the highest risk, highest reward mall operator that I know about. But if you were just having name a number 2, it'd probably be Tanger, which I can talk more about Tanger if you want.
Deidre Woollard: Yeah, sure.
Matt Frankel: [laughs] Tanger is probably my favorite retail play right now. I mentioned their stock has tripled in a year, and rightfully so, they have done an absolutely fantastic job of not only adapting to the pandemic, but trying to ride the ship. Tanger's biggest problem over the past years, some of their biggest tenants have gone bankrupt. Ciena brands, which is the parent company of Loft. Then you have all the ones that Simon bought, like J.Crew and Brooks Brothers, those were big Tanger tenants. Their occupancy rate went from 97 percent to less than 92 percent in the course of the year. To make it worse, a lot of the spots being vacant were big stores so they were left with a lot of big spots to fill. They made a couple of really brilliant moves. When they started targeting companies that don't normally have outlets, they just need a lot of square footage like they recently opened the first Dick's Sporting Goods outlet at one of their properties. If you've been in a Dick's Sporting Goods, it's a big store.
Deidre Woollard: Yeah.
Matt Frankel: Their outlet is going to be a big store. They did that and they just recently added WeWork CEO to their board, which I think is a really interesting move to really look at some outside the box ways to fill space in their centers. You mentioned that a lot of the malls are bringing experiences into their portfolio. The outlet industry really hasn't done that too much yet.
Deidre Woollard: Sure.
Matt Frankel: We're just bringing built-in sources of traffic like hotels and in this case co-working. I can see that being a win-win for WeWork and Tanger. I'm not about to buy stock in WeWork but I definitely think that they could be a big help to Tanger's vacancy problem. They raised capital, this new elevated share price, a lot of companies we cover were selling shares at fire sale prices last year. They waited, they did a great job of there were due some debt. They raised over a $136 million at elevated share prices about what it's trading at now, actually. They have a ton of liquidity. They're about to get back into growth mode. Outlet shopping is less than one percent of all retail space. This is a very young and small industry. A lot of people don't realize that. If you live in one of the coastal towns with a lot of outlets, you might not realize that. If you live in Myrtle Beach, for example, you think that outlets are the only type of retail, but if you live in a normal city, you know that they are not everywhere. There is a lot of underserved markets like Nashville doesn't really have a big outlet presence and that's Tanger's next expansion market. They're currently looking into. They've done such a great job, only 36 locations so far. Especially if you live near one you think it's a big company. It's really not that huge yet. Deidre mentioned that overall retail's collecting a little over 90 percent of rent right now, which is great compared to what it was. Tanger's at 95 percent so their tending quality is great. It's a great value proposition for retailer's outlet space. It's lower startup costs, lower rent, higher profit margins. It's a win-win and it gives them another point of contact for consumers so it adds to the omnichannel model deal. I think Tanger has got a very bright future ahead and it's not quite the no-brainer. It was when it was five dollars a share last year. [laughs] But it's still a great value, I think.
Deidre Woollard: Well, let's talk about the bad news that came out earlier this week, which is the Washington Prime Chapter 11. Not unexpected, I think on millionacres.com, we first wrote about it in November of last year. We've been watching this one flop around for a little while. The good news is here, it's a Chapter 11 restructuring. It's going to allow the lender to turn some debt into equity, it's going to give Washington Prime an extension on its loans. But it has a lot of debt. It has 3.5 billion in debt and it's a long road back for this one.
Matt Frankel: Yeah. This is the third major mall REIT to go bankrupt in the past few months. You had CBO and Associates in and you had Pennsylvania REIT.
Deidre Woollard: Yes.
Matt Frankel: Which actually it's a pretty high quality mall, so it just got over their head in debt. Here, it's a statistic about why you need to pay attention to the retail REITs with the great balance sheets and the low cost of capital. Washington Prime and Simon both saw rental income drop by about 10 percent year-over-year in the first quarter. Both Simon Property Group and Washington Prime, 10 percent decline in rent roughly. Simon's funds from operations, which is FFO, the REITs version of earnings, Simons dropped by 13 percent. About in line with what you would expect for 10 percent drop in rent. In Washington Prime's case that 10 percent drop in rent resulted in a 55 percent drop in FFO in the first quarter, almost about five times the decline of Simon's FFO. That's why it matters so much because they are the ones that can really make it through the tough times. Things got bad during the pandemic. No one ever thought Simon was going to go bankrupt, never, not for a second. Tanger even. No one really thought Tanger was going to go bankrupt. They had a ton of financial runway the whole time. EPR Properties, their primary thing is movie theaters.
Matt Frankel: No one thought they were.
Deidre Woollard: Because the biggest tenant is AMC. [laughs]
Matt Frankel: Right. No one thought they were going to go bankrupt even when they started writing off AMC's rent as uncollectible, no one thought they were going to go bankrupt because they had a ton of financial flexibility. It's so important to have that. They were profitable by the way, for most of the pandemic EPR was. It's so important to have that, and this is, I mean like you said, this was not a surprise and funny story, Washington Prime. I don't know the back story, they were actually a spin-off of Simon in 2014. It turns out Simon was right for getting rid of those assets. [laughs] The name is deceptive, they are not the prime assets.
Deidre Woollard: Right.
Matt Frankel: Of Simon's portfolio. Simon really whittled down its portfolio to the A quality malls, which Washington Prime is not.
Deidre Woollard: But they're solid Bs.
Matt Frankel: Yeah, there's solid Bs. These are not the malls in your town that people use to go to, they are still good malls.
Deidre Woollard: Yeah.
Matt Frankel: I know we have a ghost town mall in my area, [laughs] I'm sure you do too. These are not that, this is.
Deidre Woollard: The one that Seritage is going to take over at Landmark.
Matt Frankel: Right. This is solid middle of the road. I don't necessarily think it's going to be the last retail REIT to file for bankruptcy. It's not too hard to tell which ones are in danger.
Deidre Woollard: Yeah, that's a really good point that its balance sheet and we are biased right now toward those Class A properties. Those Class Bs are starting to, because of some of the bankruptcies at some of the retailers, they're just starting to have a few little holes in them in terms of vacancies. Then the Class Cs are the ones that we continue to be worried about, that those are the ones that are most prime for conversions and things like that.
Matt Frankel: That was like CBL's portfolio.
Deidre Woollard: Yeah.
Matt Frankel: They were solid Cs, if not [laughs] less.
Deidre Woollard: Yeah. You can't do much with the solid Cs unless you are really willing to put money into them and add some things or do some conversions. It's very hard once a mall has gone into the C space for it to surge backup. Whereas I believe that when you're in a B, there's more room of things you can potentially do.
Matt Frankel: Like in CBL's case like a lot of the malls had the Sears had gone bankrupt, the JC Penney had closed down. There were no anchor stores.
Deidre Woollard: Yeah.
Matt Frankel: Then slowly but surely all the other stores went away. The one in my town, I know a little bit about this just because I used to be in the restaurant business a long time to go. A lot of restaurants in malls have a clause in their lease that say if occupancy falls under a certain amount in the mall, they don't pay rent. You'll see that, back in college, I worked at a TGI Fridays that was attached to a mall. Because the occupancy fell under, I think it was 70 percent in the mall, they didn't have to pay rent. That's just adds to the spiraling effect of less rent, then occupancy falls more and someone else doesn't have to pay rent because of it and things like that. It's really easy once you fall into that C category, like you said, for it to create like a snowball effect of just heading towards bankruptcy. It's like a joint snowball heading towards the bankruptcy line.
Deidre Woollard: Yeah, absolutely. All right. Let's pivot a little bit and talk about travel because, I mean, this hour focused on leisure spending. Right now we're in this shift of everything was going to a retail now it's slowly turning. You mentioned New York reopened and California is also reopening statewide. I think that's going to have a huge impact on the tourism. We're already seeing tourism. I feel like everyone I know is going to Las Vegas [laughs] at some point. I feel like we're seeing a lot of tourism happening and seeing some pretty strong numbers. The STR is part of CoStar and they've published these hotel numbers for the US. Occupancy as of June 5th, 61.9 percent which is down 14 percent from June of 2019. They're not even counting 2020 at STR because why would you when it comes to hotels? But the average daily rate of $123.49 down 6.7 percent from June of 2019. The REVPAR, revenue per available room, which is the stat that everybody uses; $76.44 down 19.7 percent from June 2019. Those down still sounds so great, but those are the highest that we've seen since the start of the pandemic. We are starting to see and people are starting to trust hotels again. Trust is, I think, a big factor here. On the other side of things that make me feel a little bit optimistic about hotels is, right now it's almost impossible to find an Airbnb because a lot of people were seeking a vacation house. Right now, it is much, much harder to find an Airbnb than it is to get a hotel. I think that's shifting things too.
Matt Frankel: I mean, a lot of people don't trust hotels to be truly clean in normal times. In the pandemic time it's given more of a stretch.
Deidre Woollard: Yeah.
Matt Frankel: I think you quote CoStar about as much as I quote Empire State, [laughs] that's your Empire State really. [laughs]
Deidre Woollard: I do love CoStar.
Matt Frankel: [laughs] But in a normal year those numbers would be terrible. But it's interesting to point out that there are two types of travel: there's leisure travel and then there's business and group travel, pretty much everything. All of that 61% percent occupancy is leisure travel right now. Business travels, it's important to point out still has not made a comeback. People are starting to travel for business meetings again. Pretty much no conferences or conventions are happening right now. I know I was scheduled for a bunch of them in the first half of this year and none of them happened. I can't wait till CES has brought back next year hopefully. Usually conferences, let me go to Vegas and let me get out and about the country. There's one in New York I like to go to. I'm so happy New York is reopening. I can't wait to get back to New York. Hopefully, I will get back to the DC again someday. How reopened is DC by the way?
Deidre Woollard: Getting there.
Matt Frankel: It's getting there. Like down here, I haven't worn a mask in a month. I don't know how it is in DC.
Deidre Woollard: It's about 50-50 on the street now with people wearing masks.
Matt Frankel: Wow. People down here haven't worn masks on the street since I think last May, it's different worlds. But anyway, the business travel really hasn't gotten caught up yet. From an investor's point of view, a lot of hotel chains or a lot of hotel REIT have properties that mostly focused on leisure and they're the ones that you've seen. They're at 70 or 80 percent occupancy right now. Then you have a lot like some of our favorites that focus on business travel that are at 20 to 30 percent maybe they pivoted a little bit to leisure travel, things like that. Then you have some that are in the teams that specialize in group travel which really isn't happening. I will talk about one of my favorites, Ryman Hospitality Properties. Speaking of being reopened in DC, you know they're hotel in DC is still close?
Deidre Woollard: I do.
Deidre Woollard: Everything around it is open, I was just over there this weekend. The wheel is back open, the kids are on the carousel, there's a lot of people around.
Matt Frankel: The Tanger Outlets right there is open?
Deidre Woollard: It's true, yes.
Matt Frankel: They're opening July 1st by the way, if you were wondering. They are business focus auto, they've the 4th largest hotels by conference space in the US. They decided at the top of the pandemic that that one especially it didn't really have much use for leisure travel. It was just better off to shut it down. [LAUGHTER] It was going to be so bad business wise. I think Ryman's top-performing hotel is the Gaylord Palms right now which is the one right near Disneyworld. That's been the one that's been most successful for obvious reasons that pivoting a little toward leisure travel, they are at 24 percent. It's not great for some of these business hotel operators, their overall portfolio occupancy is about 16 percent. That's not including I don't think the impact of the Gaylord National Harbor which is closed. They did a good job by the way, they decided to do a full room renovation during COVID and take advantage of the situation. Every room in the building has been completely re-done. They've invested heavily, they've done a great job of positioning themselves for the future, they bought out their partners in the Gaylord Rockies in Denver for example while things were still at COVID prices I guess you'd say. They've done a great job of taking advantage of the situation, but there's a big difference between stock prices coming back which Ryman definitely is on anticipation of future business and the actual business coming back. The best statistic about Ryman and then I'll shut up about them, right now they're saying 2022 bookings. Right now obviously it's 2021, so we're talking about a year out. 2022 bookings at Ryman's Properties are stronger than 2019 bookings were a year prior. We're talking about 2022 could be stronger for Ryman than pre-pandemic times. That's pretty impressive. They successfully re-booked 64 percent of their canceled room nights and they're fitting them into future years. There could be some boom times in-store for Ryman's Properties.
Deidre Woollard: I think there's something interesting that they are doing where they plan to sell shares to raise 300 million. They're tightening up their balance sheet while their stock price is high.
Matt Frankel: Yeah, this is what I was saying. With Tanger, how they raise some capital, new higher stock price, not that their stock price is too high but it's not at a fire sale valuation like it was last year. They had to increase some debt to buy out their partners in Gaylord Rockies like I just mentioned, they have some old debt still on the balance sheet and their share prices recovered to about where it was before COVID which is pretty remarkable considering that they're still not doing any business right now. You can't walk in through one near you, but if you walk into any of the other Gaylord Hotels, it's pretty empty. Like I said, the one by Disneyworld is somewhat busy but for the most part, these are big convention hotels and they're not doing anything right now but the stock price is almost fully recovered. Raising capital to reinvest in the business at these levels is a brilliant move especially when you're talking about lowering the balance sheet, improving liquidity. Right now the business travel market is like a spring pulled back. They're trying to get themselves in the best financial position for when someone let's go that [LAUGHTER] spring. They are really doing a great job at that, much better than a lot of their peers. Some other hotel chains have raised capital and really been aggressive when it comes to investing during COVID, I don't know any of them who are doing full-scale hotel renovations in 2020. A lot of hotel rates were just like in full capital preservation mode, and Ryman really wasn't. They were doing stuff that they didn't have to do because they knew that eventually this would pay off.
Deidre Woollard: Well, sometimes you have to have faith and I think it's one of the things that is interesting to track too is where people are going. Right now you see these people going, where do they go? Places they can be mask-less and not worry about it. Miami and Tampa have seen big increases. Where people aren't going so far has been New York, Boston, and San Francisco partly.
Matt Frankel: But will change.
Deidre Woollard: Yes, [LAUGHTER] that's the thing. I think all of that is going to change. California reopening should spark some of that. Return to San Francisco, New York reopening, we should get some of the summer tourism here in Alexandria and in DC I have started to see the tourists come back and in Alexandria because it's so cute here. You get a lot of weddings and a lot of people posing on street corners, I'm starting to see that again. I'm starting to see weddings which is a good sign that people are starting to plan weddings again and starting to feel like it's possible to actually plan something six months in advance.
Matt Frankel: Please bring tourism backup where you are. I miss HQ and seeing the millionacres corner where you are. [LAUGHTER] There's a big million acres banner over Deidre's desk.
Deidre Woollard: [laughs] Who knows if it'll be there when we all return? [LAUGHTER]
Matt Frankel: You should have brought it home with you, that should have been your background.
Deidre Woollard: [laughs] Right. I think the other thing about travel too is I think we're almost to the point where we're getting ready that flying is back to normal. I was taking the metro by Ronald Reagan Airport and seeing all the cars out front like it's back and the TSA through-puts, they finally hit the two million mark on June 11th. I don't think they hit the two million mark since before the pandemic. I feel like people are starting to trust flying and that's good news for places like Vegas because you can't drive there if you're in LA, I certainly did a lot. But it's not always easy to fly, it's easier to fly a lot. That's good news. The lodging REIT numbers, just to go over that quickly, they're up 17.37 as of the end of May and were down 23.6 percent in 2020. The hotel REITs, they are coming back.
Matt Frankel: I would push back on the airplane optimism I guess I would say. I don't think we're going to see airplane travel fully come back to pre-COVID levels until they drop the mask thing. Public transit is one of the few parts of our economy where there is still a mask mandate. We got in a ferry boat in QS Florida and had to wear a mask even though we were outside on a boat in 85-degree weather, it wasn't fun. A lot of people don't want to wear masks on public transit. I'm not an anti-mask by any means, but there are a lot of people who just find it uncomfortable to be at a four-hour flight wearing a mask the whole time and I'm one of them. I'd prefer not to, I'd prefer to sit there and have my drink and sit and relax. I can't sleep with a mask on my face. Everyone wants to get out, yes, but people are going to focus on drivable destinations. A lot of hotels have actually pointed that out. EPR in their latest presentation, they pointed out that they invested in ski resorts and all of their ski resorts are specifically in driving distance to major places. Like a lot of driving distance to I think Philadelphia.
Deidre Woollard: Because there's a more East coast compared to like Vail Resorts which are more West Coast.
Matt Frankel: Vail is one of their tenants but it's all of Vail's properties that are outside of the major, like the Colorado area. These are like the east coast resorts and things like that, they're all drivable to major cities. I think that's where you're going to see the demand really spike first. I think, and don't quote me specifically on this, but I think at the end of September the mask mandate on planes is scheduled to run out. I know they renewed it, I think they renewed till September, but I think once that happens you are going to see a surge in people really willing to fly to Hawaii. That will be a 10-hour flight for me. I don't want to wear a mask on a 10 hour flight, that sounds terrible.
Matt Frankel: Like I said, I'm not an anti-mask. We're not judging anyone for masks or anything like that. I have a whole lot of masks on my desk over there. But I don't think you're going to see air travel come back to 2019 levels until that fully reopens, I guess you would say.
Deidre Woollard: Let's talk a little bit about EPR Properties because I find that one to be really interesting because it's such a mix of experiential properties and we've talked about experiential earlier. It's got AMC, it's got some ski resorts, it's got a lot of Topgolf. It seems like all of that, not a great thing to have during the pandemic. A great thing to have right now when people are like, "Hey, what can I go do? Because I want to do something, anything."
Matt Frankel: It's really unique. They focus on experiences. We mentioned earlier, their top tenant is AMC. EPR's executive team needs to get on that Reddit board and thank the Reddit traders [laughs] for pumping up AMC's stock. They need to go ahead and buy some shares themselves if they want. [laughs] They need to say, thank you. I'm not going by AMC stock, it's a ridiculous valuation, things like that. They have made AMC to the point where they can emerge from the pandemic, a stronger company [laughs] than they were going into it. People forget, the movie theater business wasn't exactly doing the best in its history right before the pandemic.
Deidre Woollard: Yeah.
Matt Frankel: I think ticket sales peaked, I want to say 2002, it was the peak year for movie ticket sales. Then streaming slowly ate into those. There's a lot of underperforming movie theaters in the country. Those aren't the ones EPR owns. They own the Megaplex Theaters, the ones that are always full, in great locations. But AMC was almost bankrupt. It was pretty much assumed they were going to go bankrupt. We mentioned rent collection and deferred rent and things like that. It got so bad that EPR wrote off their AMC rent as uncollectible at one point. I think it was in the third quarter of last year. They said, "We're not going to get any rent. Anything we get is a bonus." Now, AMC has raised about two billion dollars at elevated valuations. One year-ago, AMC's entire market cap was $600 million. Now they could raise $600 million and dilute shareholders by less than two percent.
Deidre Woollard: Wow.
Matt Frankel: That's an insane change. They're raising capital, they want to grow, they're going to hopefully pay off a little bit of debt. Hopefully, they're going to repay EPR its rent. But now, it's just such a weight off of investors shoulders in that stock. There's literally no need to worry about AMC going bankrupt anymore. The CEO said it was off the table at the end of last year. Now, it's really off the table. Now, they could probably buy a smaller competitor out if they wanted to. If Regal's theaters are taking too much of their business, they could probably buy them right now if they wanted to do. It's a different world for AMC these days. Their stock price is going to come back down to earth. It just is. I'm not saying buy AMC stock, but it really gave EPR new life. They just mentioned that they are planning on reinstating their dividends sometime in the second half. They need to wait for cash flow to stabilize which really what they were waiting on is for their movie theaters to start paying rent. Pretty much all of their other tenants are doing fine in paying rent. Like Topgolf is a big tenant of theirs. Vail Resorts is a big tenant of theirs. They have a bunch of those indoor water parks. I went to one on New Year's with my kids. It was doing great. It was almost too full for comfort. But those were doing great, they're paying rent. They're really waiting for their cash flow to stabilize from their movie theaters before they can remove their debt covenant restrictions, which I don't want to get in the weeds on that. But then they're planning on re-implementing the dividend, and they said they really want to get back to growth mode. They see a huge opportunity here, just like they did before the pandemic. They specifically mentioned things like cultural attractions, like museums and aquariums and things like that as a vertical they could go after. The golf attraction, Topgolf is growing like crazy.
Deidre Woollard: Yes.
Matt Frankel: People want to go do things like that. The drivable ski resorts, like I mentioned, are really doing well. They mentioned gaming. They own one casino property right now. I could see that dramatically increasing. But there's a big trend towards legalized gaming in the US right now, especially if you could pair it with some of the other things EPR already has in its portfolio. The casino in the mountains in North Carolina has one of those eat and play businesses attached to it that EPR already invested very heavily in. There's a huge market for people who want to get out right now and EPR really wants to take advantage. They've $1.5 billion in liquidity, including a completely untapped one billion dollar credit line. They paid off their credit lines during the pandemic, and over $500 million of cash. The whole company's market cap is less than four billion dollars. That's a ton of liquidity for a company of that size. I always talk about Empire State is having a ton of liquidity. EPR actually might have a better liquidity situation than Empire State.
Deidre Woollard: Maybe it will be more willing to spend. [laughs] You keep telling me Empire's going to spend. I'm like, "Come on. Spend the money." [laughs]
Matt Frankel: I would argue that the experiential market is more attractive than the New York office market at the moment.
Deidre Woollard: Okay, fair enough.
Matt Frankel: It's worth mentioning, before the pandemic, they were a monthly dividend stock. They're one of the rare REITs that pay monthly, and they were a 5-6 percent payer in most years. They want to bring that monthly dividend back pretty soon. I'm excited about the future for them. I think they are a very unique REIT. I think the whole hospitality industry has a whole lot more upside potential in the reopening and retail for that matter. I think things are going to continue to surprise people to the upside like we've seen so far.
Deidre Woollard: What do you think about the future of movie theaters in general? I believe at the start of the pandemic, it was talking about the fact that having AMC as the biggest tenant might be an issue. Is that something that they're looking at gradually adding more things and then diluting how important that AMC is to the overall REIT?
Matt Frankel: They haven't specifically said it, but when they talk about getting into a big growth mode again, I don't get the vibe they're going to buy more movie theaters. [laughs] I think the concentration is going to go down naturally. If they spend a billion dollars on water parks, and ski resorts, and casinos, and things like that, it naturally will reduce the concentration of movie theaters.
Deidre Woollard: Right.
Matt Frankel: I see that happening over time. If Simon owns the A malls, EPR owns the A movie theaters. There are about 40,000 movie theaters in the US, and most experts agree we need about 30,000. The industry could support about 30,000. The 10,000 that are going to close are not the ones in EPR's portfolio. Those are the ones that are underperforming, the ones that are half full even when there's a new movie out, things like that. EPR, I don't think they're going to expand that side of their portfolio. I think the movie theater business will be just fine. People want to go to the theaters. Even Disney said the future for their Pixar movies is not to put it on Disney Plus at the same time. It's to put it right to the theaters. I think Warner's made a similar announcement that beyond 2021 things are going to go right to the theaters and not on HBO Max. For the rest of 2021, Box Office revenues are going to be at subsistence level. Man, I can't talk today. It's time to get off live. But too many meetings today, I'm talked out. But the level is going to be really low for the rest of 2021. In 2022, when everyone stops putting things on streaming services at the same time as the theater releases, you're going to see the movie theater business really pop back. Movie theaters have co-existed with streaming for a long time now. It's not that streaming is going to cause the demise of the movie theater overnight. I mentioned that ticket sales peaked in 2002. They haven't declined by a ton, and per seat revenue has increased so much, because the younger generations want things like the fancy seats. They want better dining options in theaters. They want theaters that have full bars in them, not just a 80-ounce Coca-Cola for $20 or whatever you used to buy. They want these fancier options, and it's increased revenue to the point where it's even overtaken the decline in ticket sales that resulted from streaming. I think the movie theater business and streaming can really co-exist well. How long has Netflix been streaming for? Did it kill the movie theater business? No. Even the streaming services that have great movie studios like Disney are saying that they're going to be a theater first model. I think there's something to that. There's a reason they're doing that. It's because that's where they can generate the most revenue. If they didn't think people were going to go to the theaters, they wouldn't be doing that. If Disney thought that they could make more money by releasing things on Disney Plus for $30, that's exactly what they would do. Disney is a business. They want to make money. I think movie theaters in general will be just fine. If you are own any other REITs that have a big movie theater concentration like Realty Income, or STORE Capital, or any of those, I think you don't have anything really to worry about.
Deidre Woollard: Alamo Drafthouse has come back out of bankruptcy and they've restructured. I think you're right that it's not just the movie, it is the experience itself.
Matt Frankel: If you're just tuning in, I'm not telling you to invest in AMC. [laughs] That's not the point of the movie conversation. I am talking about the companies that own the physical buildings that theaters operate in.
Deidre Woollard: Yes. Invest in the real estate.
Matt Frankel: It's a good final disclaimer, I guess.
Deidre Woollard: That is a perfect place to end things.