Investors Skeptical As Retail REITs Experience Occupancy, Rent Surge

Last month, retail overtook oil and gas as the most distressed sector in the U.S. economy. Anchors like Macy’s, Sears, Walmart and J.C. Penney are closing hundreds of stores nationwide. But for CEOs of some of the country’s biggest retail-focused real estate investment trusts, their biggest challenge is not filling their anchor vacancies.

It is convincing investors their businesses are not floundering.

“What we’re dealing with is a little bit of a perception recession in retail,” Kimco Realty Corp. CEO Conor Flynn said. 

While the owners of retail real estate are impacted by store closings, the lack of new retail construction — Flynn said retail is at a 38-year low for ground-up development — means retailers that are growing, like successful omnichannel concepts and off-brand concepts like Nordstrom Rack and Marshalls, are comfortably filling vacancies.

The decline of traditional anchors is well-documented in business news headlines, but the growth of restaurants, specialty grocers and entertainment has helped keep retail vacancies low in major markets.

“We’ve had our highest occupancy level in our history,” said Joe Coradino, the CEO of Pennsylvania Retail Investment Trust, which owns about two dozen malls in New Jersey, Pennsylvania, Michigan, South Carolina and the Washington, DC, metro area. “When you think about the retraction that’s occurred, it provides us with an opportunity to put more productive retailers in there. While there may be a short-term dip, longer term you’ll be bringing in stronger retailers that will drive traffic, sales and income in the property.”

PREIT had three Sears in its mall portfolio close, and has leased all of the vacated space, close to 400k SF. Coradino said the tenants that are moving in, like the Dick's Sporting Goods and Field & Stream that replaced the Sears in Capital City Mall in Pennsylvania, will pay more in rent and drive more interest than Sears.

Kimco does not own malls, but is the biggest REIT specializing in open-air shopping centers in the country. Despite that, Flynn, who is speaking at Bisnow’s East Coast National Retail Series on April 4, said it is challenging to convince investors that the troubles with Macy’s and Sears do not affect his company’s portfolio.

“We’re doing a lot of PR to fight the perception that what’s happening with the malls and department stores, we’re not being lumped into that,” he said. “We’re not. People have to realize that we don’t have exposure to department stores.”

Coradino said his company has also increased its investment into social media and outreach. He went to 100 investor conferences around the country last year, and plans to go to more to let investors know his business is much healthier than that of some of his biggest tenants.

“Three, four years ago, nobody really spent a lot of time thinking about communicating at the level we’re doing right now,” he said. “We’ve got a new head of the International Council of Shopping Centers. A big part of his job is speaking to the various news outlets from CNBC to Bloomberg, to make sure the marketplace understands that we’re alive and well.”

While occupancy is high and same-store rent growth is strong in many of the major retail REITs, the market is not nearly as bullish as the executives leading the companies.

Despite record occupancy and swift replacement of shuttered anchors, PREIT’s stock price closed Wednesday at $16.51, a slight improvement over Friday’s $16.24, the lowest it had reached since 2012. Kimco closed trading on Wednesday at $23.76, its lowest price since September 2015, the same day the Dow Jones closed at a record high. GGP, another one of the biggest retail REITs in the country, is hovering at $24.78, slightly above the 52-week low it set at the end of January.

“Our stock price is very important, which is why this communication issue is an important one,” Coradino said. “All of the mall REITs are trading well below net asset value. It’s a bit undeserved, but the fact is the market is overreacting.”

Retail Properties of America CEO Steve Grimes said an analysis of RPAI’s stock price showed an increase when he and his executive team traveled to investor conferences. And he expects to outperform his stock — hovering around $15/share, down from a 52-week high of $17.63 in July 2016 — and believes investors are waiting to time the market correctly.

RPAI has engaged in an aggressive sell-off strategy in the non-core market; it sold 3M SF of retail properties for $543M in 2016 and sold $516M worth of assets in 2015. Grimes said RPAI plans to sell another $1.5B in the next two years. Over the same four-year span, Grimes anticipates RPAI will have acquired about $1.6B worth of properties in its 10 major markets.

RPAI’s sluggish stock performance, “has everything to do with when is the earnings inflection point with the transformation of our portfolio,” he said. “People are trying to time the right time to buy into our stock.”

Kimco has also sold all of its assets outside of the 25 biggest markets in the U.S., and has exited all of its joint ventures and investments outside the country. Now it is in the midst of redeveloping some properties into mixed-use hubs, like Pentagon Centre in Arlington, Va., where it is building a $150M apartment building over ground-floor retail where it owns a single-story shopping center.

The retail was performing well at the property, which includes one of the highest-grossing Costco stores in the country, Flynn said. But the area around that property has been a hub of high-rise development, and Kimco decided to join the party, getting the highest and best use of its real estate. It is one of several properties around the country Kimco is spending $20M or more redeveloping, what Flynn called its signature projects.

To the market at large, all these efforts have not made much difference. The rest of the economy is growing and the stock market is hitting record highs, but publicly traded owners of retail real estate are caught in the cloud of negativity surrounding retail.

“We’re hitting all-time highs in terms of occupancy, our base is performing excellently,” Flynn said. “What we’re battling is perception vs. reality.”