Retail REITs Boost Outlooks Amid Strong Leasing, Rent Growth

Inflation is still higher than the Federal Reserve chair would like, but that’s not keeping people from buying, or stores from opening, and paying good money to do so.

The country’s largest publicly traded owners of retail real estate are boosting their outlooks for the rest of the year after a strong first half.

Even amid macroeconomic hurdles like elevated interest rates and inflation, there is strong demand for retail space, REIT executives said on second-quarter earnings calls. And in response, they're becoming more bullish. 

Publicly traded REITs Simon Property Group, Kimco Realty, Brixmor Property Group, Regency Centers, Federal Realty Investment Trust and NNN REIT all increased their projected funds from operations for the year, citing strong leasing activity, high occupancy levels and rent growth. 

Indeed, the country is seeing a tight retail market. Retail vacancy was at 5.3% during the second quarter, according to Cushman & Wakefield, the lowest in the last two decades. The average asking rent was $24.37 per SF, up 3.8% from the same time last year. Meanwhile, there’s been a limited amount of new supply, with the capital market still waiting for an interest rate cut, and REITs are on the winning end of those dynamics. 

Regency Centers, a Jacksonville, Florida-based REIT, increased its funds from operations guidance from a range of $4.15 to $4.21 per share to $4.21 to $4.25 per share. President Lisa Palmer said on its earnings call this is due to the strength in leasing activity it saw in the first two quarters. 

“Sales and traffic trends remain steady, and leasing demand continues to be strong,” Palmer said. “We are taking advantage of this solid and consistent tenant demand to drive rent growth and leasing with strong new and existing tenants,” she said.

The increased projections from these retail REITs have helped them outperform the broader stock market, which had its worst day in two years on Monday.

The S&P 500 had fallen 6.1% over the last five days as of market close Wednesday, while over the same period, the six retail REITs tracked by Bisnow were either up or had fallen less than the market. Regency Centers was up 2.6%, NNN REIT was up 3%, Simon Property Group was down 1.1%, Kimco was down 2.9%, Federal Realty was down 0.4% and Brixmor was down 1.5%.

The REITs' increases in projected FFO, a key metric public companies use to demonstrate how much value they are taking in, were fueled not only by high occupancy numbers, dwindling supply and fast lease-ups but also by the amount the owners can raise their rents with turnover, renewals and options.

Kimco Realty inked 482 leases last quarter totaling 2.3M SF. Of its 144 new leases, it secured rent increases of 26% from the prior tenants and raised rents 9% on renewals and options. 

The REIT raised its FFO guidance from a range of $1.56 to $1.60 up to $1.60 to $1.62 per diluted share.

“The primary driver really is the operating portfolio,” Kimco Chief Financial Officer Glenn Cohen said on the earnings call when asked about the increase. “Again, our rent commencements have been quicker than what we had originally forecasted. That's a major driver.”

Meanwhile, Regency Centers saw overall rents increase by 9.2%. The REIT is ironically “comfortable” with tenants giving space back, Palmer said, so it can sign new leases with better merchandising at higher rates. 

“So when a lease comes up for renewal, if a tenant isn’t necessarily going to pay what we want them to pay, we’re happy to move on,” she said. 

Brixmor raised its FFO guidance from a range of $2.08 to $2.11 up to $2.11 to 2.14 per diluted share. The company executed 1.3M SF of new leases and renewals, with record occupancy and record rent increases. 

“We're in a great supply-demand environment that allows us to drive the optimal outcome for space as it comes due,” Brixmor CEO James Taylor said on the company's earnings call. “And you see it in the spreads. You see it in the renewal spreads as well as the new leasing spread.”

Brixmor's leased occupancy was at a record 95.4%. 

Even with an all-time low vacancy on anchor space, the company, like a number of mall and shopping center owners, has had to contend with a slew of bankruptcies over the last 24 months. 

It has a number of Conn’s HomePlus stores, which it now has to find replacements for after the home goods retailer announced it would be shutting down all of its locations last week. But Brixmor expects that leasing the locations will be easy.

“Our team is well on their way to backfilling these spaces in markets like Raleigh and Houston with better tenants at higher rents,” Brixmor Chief Operating Officer Brian Finnegan said. 

Simon revised its 2024 FFO to be between $12.80 and $12.90 per share, compared to the $12.75 to $12.90 range it had forecasted last quarter. 

The REIT signed 1,400 leases in the quarter totaling 4.8M SF. Its occupancy was 95.6%, up from 94.7% year-over-year. Minimum base rent was $57.94, up 3% from the previous year. Its Mills portfolio was 98.2% occupied and base rents increased 3.9%.

Increased leasing volumes, occupancy gains, shopper traffic and retail sales resulted in the highest level of real estate NOI for the second quarter in Simon’s history, CEO David Simon said, adding that “demand for our space from a broad spectrum of tenants is strong and steady.”

NNN REIT raised its FFO projection from a range of $3.25 to $3.31 up to $3.27 to $3.33 per diluted share. 

In its earnings report, CEO Steve Horn attributed the move to a “thoughtful approach to raising and deploying capital, combined with our high occupancy and active management of our robust portfolio.” 

Federal Realty Investment Trust updated its FFO guidance from a range of $6.67 to $6.87 up to a $6.70 to $6.88 range per diluted share. 

“This upward revision is driven by stronger underlying portfolio performance than expected, as occupancy metrics outperform expectations,” Federal Realty Chief Financial Officer Dan Guglielmone said on the company's earnings call.

He also pointed to the acquisition of the Virginia Gateway and Pinole Vista Crossing centers and its Third Street Promenade portfolio sale in Santa Monica, California, as reasons for raising its guidance. 

The REIT reported a record second-quarter leasing volume of 594K SF, just 4K SF shy of the company's overall record quarter.

Leased space was 95.3%, up 94.3% from the prior quarter, a level CEO Don Wood said had not been “seen since the 2017-2019 time period.”

On the earnings calls, executives of the retail REITs spoke specifically about the strength they’re seeing in the grocery sector.

Federal Realty’s Huntington Shopping Center on Long Island landed a new Whole Foods, which just opened this week.

Also on Long Island, Brixmor purchased West Center for $17M last quarter. A month into ownership, it has identified several groceries to backfill an empty box “at highly accretive brands,” Taylor said. 

Last quarter, the company added a Sprouts Farmers Market to proactively backfill a Conn's in Knoxville, Tennessee, where it was able to nearly triple the rent.

Of Regency Centers’ list of leases that have been signed but not opened, the top six are grocery stores, Chief Operations Officer Alan Roth estimated.

Kimco reported five grocery-anchored leases during the second quarter. 

“And we feel like that demand is still accelerating,” Kimco CEO Conor Flynn said. “And when we look at our portfolio, a lot of our strategy is to utilize the platform and the team to go and unlock more value by adding groceries to it. So there's a lot of momentum there.”

CORRECTION, AUG. 15, 8:45 A.M. ET: A previous version of this article misstated the name of Federal Realty Investment Trust’s chief financial officer and one of the REIT’s projects. It has been updated.