As Retail REIT Losses Deepen, Optimism Returns With Vaccine News, Spending Rebound

While the bottom lines of some of the largest publicly traded retail REITs continued to deteriorate in the third quarter, many executives say they are finally emerging from the worst of the coronavirus pandemic with renewed momentum.

But despite continued struggles within the retail real estate industry — with retailers emptying nearly 15M SF of storefronts and shop space across the U.S. in the third quarter, according to CBRE — landlords saw glimmers of hope that consumers were spending again and retail tenants were paying more in rent.

“We have withstood COVID. We have withstood government shutdowns. We have withstood a lack of federal and state help, especially in real estate taxes,” Simon Property Group CEO David Simon said Monday on his company’s quarterly earnings call. "We have withstood fires in Northern California, hurricanes in Louisiana and elsewhere and civil unrest, and we're pleased with the cash flow we're generating."

Pfizer’s announcement on Monday that initial trials of its COVID-19 vaccine were 90% effective have helped the mood among retailers, Simon said on the earnings call. That could give consumers the confidence to keep returning to stores.

“There's a little more pep in the step. I just think it's good news,” he said. “We were headed that way anyway.”

Retail REIT stocks soared on the news. The Dow Jones U.S. Retail REIT Index was up 23.8% this week to $69.47 after trading closed Tuesday. It is still a far cry from the index's pre-pandemic high of $105.37 on Feb. 21.

Most of the largest publicly traded owners of retail real estate saw their financial performance decline in the third quarter. On Monday, Simon — the largest retail REIT by market capitalization — reported a profit of $146M for the quarter, down from the $254.2M profit it turned in the second quarter and far below its $544M profit from Q3 2019.

Other major retail REITs lost millions in the quarter, including Federal Realty Investment Trust ($30.3M), Kimco Realty Trust ($44.7M), Macerich ($22.6M) and Brookfield Property Partners ($135M).

Negative net absorption tallied 14.8M SF at retail properties across the country in Q3, with neighborhood shopping centers and strip centers accounting for more than half that figure, according to CBRE's third-quarter report.

The national vacancy rate rose to 6.6% from just above 6% at the start of the year. CBRE researchers concluded retail's fundamentals worsened in the third quarter, despite a record low in construction completions.

Despite the losses and retailer closures, retail REIT executives said they see the fundamentals of the industry improving.

“We do think we are probably at, or very near, a low point in terms of that sort of traumatic impact that the economic shutdown brought on ... Think about it: In the second quarter, everybody was forced into closures. Now, they have largely all reopened,” Brookfield CEO Brian Kingston said on his company's earnings call. “And I think what we’re left with now is a much stronger field of tenants whose businesses have largely stabilized.”

Nareit Senior Vice President Calvin Schnure said the rise in the number of consumers shopping that began in summer as communities began to reopen again is finally moving upstream to retail landlords. After retail and food sales dropped from $527B in February to $412.7B in April, according to the U.S. Census Bureau, sales have steadily risen and are now past pre-pandemic levels. Retail sales in September were more than $549B, according to the bureau.

“The parts of the economy that shut down the fastest in March and April are the ones that are coming back,” Schnure said. “There's certainly progress, and we're going in the right direction.”

Many retail landlords showed vast improvements in collecting rent, on average bringing in 88% of expected rent in the third quarter, compared to the mid-60s percentages from the previous three months, said Floris van Dijkum, a managing director at investment firm Compass Point.

REITs that saw rent collections rise included Brookfield, Macerich, Kimco and Simon, which netted 85% of its billed rents in the third quarter, up from 72%.

“We're fighting for every dollar from every tenant, whether they're a cash basis tenant, or an accrual basis tenant,” Federal Realty Chief Financial Officer Dan Guglielmone said on a Nov. 6 earnings call. The company collected mid-80% rents from its tenants each month between July and October, it said.

Many REITs also reported gaining traction with leasing activity as well as having to reserve less capital for unpaid rents. Kimco saw rent deferrals decline from $51.7M in the second quarter to $28.3M in the third.

“Our portfolio has remained resilient during the pandemic, with occupancy currently at 94.6%. We are seeing a pickup in leasing demand, and our leasing pipeline is starting to build to a level we experienced pre-COVID,” Kimco CEO Conor Flynn said in a Nov. 5 earnings call. “We anticipate a faster recovery for anchor occupancy versus small shops and for essential retailers versus nonessential ones.”

Retailers may be bolstered by a consumer base that is more cash-rich this holiday season than in past years, The Shopping Center Group partner Marc Weinberg said. And that will continue to help retail REITs' performances.

“With consumers not spending money on vacations and entertainment during COVID, most of our consumers in our markets have money to spend this holiday season,” he said. “This is all uncharted territory as far as the holiday season under COVID conditions.”

Landlords are bracing for the potential that governments may resort to shutting down nonessential retailers as the U.S. experiences a renewed spike in coronavirus cases. The U.S. set a new COVID-19 hospitalization record Tuesday, surpassing the country's April peak. France and Germany reimposed lockdown measures late last month as they faced a resurgence in the pandemic, which could foreshadow similar measures stateside.

In the U.S., so far, the response to rising COVID-19 cases has been more muted. Simon reported that only one of its malls was has been temporarily shut down, in El Paso, Texas, on Oct. 30 after the city government declared that all nonessential businesses needed to close. The move prompted Simon to criticize the way some governments “unfairly and inconsistently” treated mall owners.

“I think we're making basically all the right moves,” he said on the earnings call. "But we can only deal with what we can deal with. I don't know if further restrictions will be in order. We have yet to see any evidence that our environment spreads anything."

Some retail REITs may weather further government-mandated closures better than others, especially if their portfolios contain tenants that are considered essential, such as grocery stores and drugstores, van Dijkum said. 

“[Retailers] think we could see some more lockdowns. But it won't be as draconian as it was in April and in May. I think people have learned a little more about what to do,” van Dijkum said.