Retail REITs Nonplussed Ahead Of Possible U.S. Economic Downturn

U.S. inflation is slowing, per new July data, staving off fears customers might strip down their budgets considerably ahead of a possible recession.

But even before that data was released, second-quarter reports from major retail REITs indicated landlords were already largely unconcerned with inflationary impacts on shopping habits, leasing, store growth and their own bottom lines.

Retail REITs, particularly those specializing in luxury spaces targeting high-dollar consumers, are more than staying afloat. Retail giant Simon reported second-quarter mall sales up 7%, despite longstanding fears about the death of malls pre-dating the pandemic. Simon reported record sales of $746 per SF in malls and outlet stores, up 26% over last year.

Simon CEO David Simon also reported occupancy the highest he has seen in seven years at almost 94%, according to an Aug. 1 earnings call. 

"Our business is strong," Simon said in the call. "The higher income consumer is in good shape, brick-and-mortar stores are where the shoppers want to be, outpacing e-commerce across the world and the broad retail spectrum. Demand for our space is extremely strong."

Other REITs owning malls or shopping centers likewise reported high occupancy.

Macerich reported nearly 92% occupancy, up from 2021 and above pre-pandemic levels. It executed 274 leases last quarter, 27% more than in Q2 2021 and up 42% over Q2 2019. Executed leases for the quarter included tenants in health and fitness, food and beverage, entertainment, sports and non-retail tenants like coworking, hotels and multifamily. It also reported digital-first brands like Alo Yoga, Allbirds and Vuori snatching up brick-and-mortar stores.

“We remain confident given the healthy retailer environment that exists today coupled with our strong leasing pipeline that occupancy will continue to increase throughout 2022 and into 2023,” Macerich Senior Executive Vice President of Leasing Doug Healy said in the company's July 28 earnings call.

Other retail REITs, such as Pennsylvania Real Estate Investment Trust, are leaning on a diversity of tenants to weather inflationary concerns. Year-to-date, PREIT same-store net operating incomes were 3.6% higher than last year, the company said, about 96% of 2019 levels.

“We believe we positioned our properties well to withstand varying economic conditions, including offering an array of retail spanning traditional full price to value retail and fast fashion,"  PREIT CEO Joseph Coradino said in an Aug. 9 call. "Our one-stop shop model allows consumers to get everything they need in one trip."

PREIT's results continue something of a turnaround since it filed for Chapter 11 bankruptcy in November 2020 to restructure its debt amid pandemic-related mall closures and tenant bankruptcies. 

"It’s noteworthy that tenant sales are growing, traffic is ahead of last year and 2019, and leasing activity remains robust, with occupancy improving by nearly 5%, all of which improves the value of our properties," Coradino said, adding PREIT intends to refinance its credit facility at the end of next year. "We have identified additional asset sales that will allow us to further improve our liquidity position and continue to reduce our debt."

Some Q2 performance results were better than even analysts expected. Kimco beat Wall Street expectations by reporting funds from operations at 40 cents a share, versus analyst estimates of 38 cents per share.

In its July 28 earnings call, Kimco CEO Conor Flynn said it intends to do even better in the quarters ahead by improving retention, raising occupancy and cutting tenant churn, particularly by focusing on last-mile locations, which he said are experiencing traffic patterns 101.3% above the same period last year.

Flynn said Kimco consumers live "in the first ring suburb of the top major metro markets where employment and spending power remains strong."

And though it can't ignore the impact of inflation, he said, "the consumer remains resilient for now."

Retail sales stumbled earlier this summer when consumers saw hikes in food and gas prices, and large retailers like Walmart and Target began to cut profit forecasts after lowered demand. Retail sales dropped 0.3% in May, Reuters reported in June. But high-end consumers still haven’t stopped making pricey discretionary purchases in areas like health and fashion.

About 85% of consumers who make $200K a year or more are still planning on shopping — and splurging — as they had been for the next three months, according to Retail Consumer Experience.

Simon is seeing that trend, noting its value brands are softer than its moneymaker luxury retailers. Simon- and Authentic Brands-owned SPARC, which includes clothing retailers Reebok and Forever 21, are passing more inflationary costs to consumers, according to Simon, and sales are weaker.

“There will be a little more volatility from quarter-to-quarter when it comes to SPARC and JCPenney, but please keep [it] in … proper perspective. It's all upside from here,” David Simon said. 

Those companies that experienced losses pointed at poorly performing retailers that they hold stock in, such as Kimco citing its shareholder loss of 21 cents per diluted share because Albertsons’ value lowered. Kimco has stock in Albertson’s. Macerich, which came in at $1.18M under its expected revenue target and saw an overall 5.3% year-over-year dip, also cited poorly performing retailers, as well as blaming Covid-19 rental assistance that it had provided to tenants in Q2 2021.

“We are cautiously optimistic … but we are watching pretty closely what's happening in the economy," Kimco Chief Financial Officer Glenn Cohen said.