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Major Retail Landlords Had A Decent Q1, But It’s Not The Runaway Success Investors Hoped For


As the vaccine rollout accelerated across the U.S. in the first quarter of 2021, consumers began heading back to shopping malls in greater numbers. For mall operators, that has produced first-quarter earnings results that, for the most part, have met or slightly exceeded financial expectations.

But there has also been disappointment. Operators are continuing to struggle with occupancy rates, dampening hopes of a speedy recovery to pre-pandemic levels.

Earlier this week, Simon Property Group reported an overall tenant occupancy rate in Q1 of 90.8%, down by 50 basis points from the prior quarter, and lower than the 94% occupancy reported during the same quarter in 2020, which didn't reflect the coronavirus pandemic. Simon Property Group CEO David Simon said during a quarterly earnings call that the firm will not be able to return to 2019 levels of occupancy until 2022 or 2023.

At the end of Q1, Simon's portfolio consisted of 233 open-air and enclosed malls, totaling 189M SF in North America, Asia and Europe. Simon’s total reported revenue was $1.24B in Q1, up from $1.13B in Q4 but lower than the $1.35B reported for Q1 2020.

Similarly, Kimco Realty Corp. CEO Conor Flynn said in a quarterly earnings call that Q2 2021 is expected to be the trough for occupancy levels across his firm’s portfolio. Occupancy dipped to 93.5% in Q1, down by 50 basis points from Q4 and lower than the 96% occupancy reported during Q1 2020.

At the end of Q1, Kimco Realty's portfolio consisted of 398 open-air shopping centers and mixed-use assets, totaling 70M SF. The firm's reported revenue was $282.3B in Q1, up from $269.4B in Q4 but lower than the $289.7B reported for Q1 2020.

Federal Realty Investment Trust, which operates 101 retail properties totaling 23M SF, also saw occupancy fall from 92.2% in Q4 to 91.8% in Q1. Federal Realty Investment Trust Chief Financial Officer Dan Guglielmone said during an earnings call that he expects occupancy to trough in the next quarter or two, though it may not be as severe as originally thought because leasing volumes have been relatively healthy.

The firm reported total revenue of $218.2B in Q1, down from $219.5B in Q4 and lower than the $231.6B reported in Q1 2020.

CFRA Research Vice President, Equity Research Chris Kuiper said that Q1 2021 earnings for mall and shopping center firms may have been a letdown to some investors.

“Overall for Q1, results are about in line [with] what people were expecting — a little disappointing though. Simon did raise their guidance, but I think it was less than what investors were expecting or hoping for,” Kuiper said.

Regency Centers Corp., which operates 406 retail centers totaling more than 55M SF, fared the best for occupancy. It saw a small occupancy decline across its portfolio, from 92.3% in Q4 to 92.2% in Q1 2021. The firm also uses other metrics to look at occupancy, such as net effective rent paying occupancy. By that metric, the company has an occupancy rate of about 87%.

Regency Centers Corp. Executive Vice President and CFO Mike Mas said during an earnings call that from that standpoint, he believes the company has troughed.

The firm reported core operating earnings of $146.7B in Q1, up from $125.1B in Q4 but lower than the $153.7B reported a year prior.

Kuiper noted that a growing trend among mall operators such as Simon Property Group and Tanger Factory Outlet Centers is temporary leasing, where small or emerging retailers are being offered very good rent deals for short-term leases. But it is unclear how likely it will be those tenants stick around in the long term as rents go up.

Aside from the coronavirus pandemic’s impact on retail tenants, Kuiper said mall operators are still battling problems that were hurting them before the pandemic: changing consumer behavior and the rising popularity of online shopping.

Kuiper said his firm remains neutral to negative on a lot of mall operators. Share prices have been rising in anticipation of the vaccine rollout and consumer demand, but malls are still struggling to return to the baseline of where they were before the pandemic.

“Again, they're only barely getting back to where they were before. And they're still facing all the same problems and even more,” Kuiper said.