Strip Mall REITs Face Uphill Climb As Tenants Struggle Amid COVID-19

Despite stay-at-home restrictions being lifted, strip mall REITs aren’t out of the coronavirus woods yet.

As purveyors of gyms, restaurants and other entertainment venues , REITs have taken a beating from the pandemic as online retailers expanded their reach—signaling what may be a longer-term shift in demand—and as uncertainty lingers, according to analysts Michael Gorman and James Sullivan of BTIG’s REIT Research Team  in a recent report.

“Strip Center Strip Mall REITs have borne a disproportionate share of the market dislocation related to the coronavirus pandemic,” write both analysts in the June 25, 2020 report. “The group is down 35.5% year-to-date, compared to a 12.8% decline for the broader REIT sector, and a 2.1% decline for the S&P 500.”

The BTIG report cites tenants such as grocery stores, drug stores, and superstores as having performed well as ‘essential’ businesses that have delivered rent on time more often during the pandemic.

“For investors looking for exposure, we continue to favor stable, grocer anchored portfolios with positively trending rent collection statistics rather than trying to push further out the risk curve,” said Gorman and Sullivan.

Regency Centers fits the bill and why Gorman raised its price targets to $50 from $40.

“We believe Regency’s grocery-anchored portfolio is well positioned to outperform in the current environment and should drive above-average growth in the long term,” wrote Gorman.

Other strong performers with improving price targets include: Retail Opportunity Investments upgraded to $14 from $10, and Weingarten Realty to $23 from $19 by Gorman.

Meanwhile, “landlords have had to adapt to complexities associated with the ‘new normal’ under COVID-19,” said the analysts. “Even as stay-at-home orders that halted in-store businesses start to wane, challenges remain.”

The report notes approximately 71% of tenants are open and operating  by annualized base rent, but BTIG’s coverage group collected only 68% of April rents and 60% of May rents.

“June and FY2020 collection outlooks vary across the sector while uncertainty remains a common theme,” said the analysts. “Tenants that are reopening often do so at lower capacity, and it is unclear what the default rate on deferral agreements with landlords ultimately will be.”

The unevenness has frustrated liquidity cushion across the retail REIT sector, added Gorman and Sullivan,  who cited three of seven companies in their coverage group as having suspended their dividend entirely and one cutting its distribution by 45%. The same coverage group had drawn on its line of credit in some capacity since March when the pubic health crisis began to take hold.

Despite a challenging sector, the report doesn’t anticipate material cash burn rates in the current quarter with cash collections maintaining pace to cover most costs.

But the report notes how the wider Strip Mall REIT sector is currently trading at a 35% discount compared to REIT’s overall, which “could result in pent up investor demand in the face a potential second virus wave and further lockdown restrictions,” predicted the analysts.

Other REITs experiencing volatility based on the BTIG report include:

• Federal Realty Trust, neutral buy. Gorman is lowering his 2020 FFO/sh estimate from $6.45 to $5.59 and $6.57 for 2021 to $5.95, noting FRT continues to record some of the lowest April– June rent collection rates.

• Kimco Realty Corp, neutral buy. Gorman is lowering 2020 FFO/sh estimate from $1.44 to $1.30 and 2021’s from $1.50 to $1.38 as KIM maintains a lower percentage of ‘essential’ retailers compared to other REITs.

• Kite Realty Group, neutral buy. Gorman is lowering 2020 FFO/sh to $1.33 from $1.51 and 2021 FFO/sh to $1.36 from $1.55. Gorman said although June rent collections by KRG are trending ahead of April and May, and 91% of tenants by ABR are now open in some capacity, growth concerns extend to 2021.