'Foundation for Growth' in Shopping Center REITs

PHOENIX—For Regency Centers Corp. (REG) and other shopping center REITs presenting at NAREIT's annual REITWorld conference this week, the near-term outlook is generally stable, with strong fundamentals underpinning future growth. That's a key takeaway from meetings which analysts held with real estate trusts in the retail space, as well as other sectors, on the conference's first day.

The big news for REG, of course, is that it's about to become the largest REIT by equity value in the shopping center index, as a consequence of its pending merger with Equity One (EQY). Noting that REG expects “healthy growth” from the EQY locations in its post-merger portfolio, analysts with RBC Capital Markets wrote in a client note, “We believe there is an opportunity to boost the small shop leasing at EQY properties” and that when the deal closes REG could see cost benefits from its larger scale, “which should benefit the whole portfolio.”

For their part, Capital One Securities analysts meeting with REG management at the two-day conference noted a cautious outlook for development and redevelopment post-merger. “Our expectation is that much of what was in the EQY development pipeline will disappear until REG is ready to act on it given its approach to the re/development schedule is the most conservative among peers,” they wrote in a report Wednesday. As for REG's own scope of development activities, the Capital One analysts foresee “no change,” with REG continuing to focus on “the retail component of the project” and looking for specialists to either joint venture “or outright sell the non-retail component of any mixed-use development.”

Fitch Ratings said Wednesday it was reaffirming REG at BBB+ and maintaining a “stable” outlook for the REIT following the announcement that it intended to merge with EQY. “Fitch views the transaction positively given the quality of EQY's portfolio, its geographic overlap with REG's in higher barrier to entry markets and the potential for the issuer to have improved access to debt and equity capital as the largest shopping center REIT,” according to a note from the ratings agency.

Although they may not have pending mergers to drive organic growth, other retail REITs took an upbeat stance in their REITWorld meetings. RBC analysts reported that Macercih management “feels better about the mall business vs. 90 days ago despite decline in the REITs,” and that higher expected increases from CPI-based leases “should provide a tailwind” for same-store NOI growth.

Management at Urban Edge Properties, the Vornado Realty Trust spin-off which announced Monday that it would acquire Hudson Mall in Jersey City, NJ for $43.7 million, “was circumspect about the REG-EQY merger and reiterated the value and importance of being the local sharpshooter,” wrote Capital One's analysts Wednesday. “Recent acquisitions demonstrate the success and value enhancement of the strategy.”

In reporting its affirmation of REG's ratings, Fitch notes that operating fundamentals for shopping centers remain favorable, “driven in large part by limited new supply.” That being said, Trepp LLC noted in a separate report that the past couple of years have represented a “turbulent” time for shopping center operators, and that October's CMBS delinquency rate increase was driven largely by retail delinquencies.

“The retail landscape continues to gravitate towards online shopping and new companies on the rise that have adapted to modern Millennial trends,” according to Trepp. “While the rush of store closings can be troublesome to retail CMBS loans, these new companies (along with food services), helped these loans post an average occupancy of 94.2% last month, which indicates a sturdy foundation for growth in the retail sector.”

PHOENIX—For Regency Centers Corp. (REG) and other shopping center REITs presenting at NAREIT's annual REITWorld conference this week, the near-term outlook is generally stable, with strong fundamentals underpinning future growth. That's a key takeaway from meetings which analysts held with real estate trusts in the retail space, as well as other sectors, on the conference's first day.

The big news for REG, of course, is that it's about to become the largest REIT by equity value in the shopping center index, as a consequence of its pending merger with Equity One (EQY). Noting that REG expects “healthy growth” from the EQY locations in its post-merger portfolio, analysts with RBC Capital Markets wrote in a client note, “We believe there is an opportunity to boost the small shop leasing at EQY properties” and that when the deal closes REG could see cost benefits from its larger scale, “which should benefit the whole portfolio.”

For their part, Capital One Securities analysts meeting with REG management at the two-day conference noted a cautious outlook for development and redevelopment post-merger. “Our expectation is that much of what was in the EQY development pipeline will disappear until REG is ready to act on it given its approach to the re/development schedule is the most conservative among peers,” they wrote in a report Wednesday. As for REG's own scope of development activities, the Capital One analysts foresee “no change,” with REG continuing to focus on “the retail component of the project” and looking for specialists to either joint venture “or outright sell the non-retail component of any mixed-use development.”

Fitch Ratings said Wednesday it was reaffirming REG at BBB+ and maintaining a “stable” outlook for the REIT following the announcement that it intended to merge with EQY. “Fitch views the transaction positively given the quality of EQY's portfolio, its geographic overlap with REG's in higher barrier to entry markets and the potential for the issuer to have improved access to debt and equity capital as the largest shopping center REIT,” according to a note from the ratings agency.

Although they may not have pending mergers to drive organic growth, other retail REITs took an upbeat stance in their REITWorld meetings. RBC analysts reported that Macercih management “feels better about the mall business vs. 90 days ago despite decline in the REITs,” and that higher expected increases from CPI-based leases “should provide a tailwind” for same-store NOI growth.

Management at Urban Edge Properties, the Vornado Realty Trust spin-off which announced Monday that it would acquire Hudson Mall in Jersey City, NJ for $43.7 million, “was circumspect about the REG-EQY merger and reiterated the value and importance of being the local sharpshooter,” wrote Capital One's analysts Wednesday. “Recent acquisitions demonstrate the success and value enhancement of the strategy.”

In reporting its affirmation of REG's ratings, Fitch notes that operating fundamentals for shopping centers remain favorable, “driven in large part by limited new supply.” That being said, Trepp LLC noted in a separate report that the past couple of years have represented a “turbulent” time for shopping center operators, and that October's CMBS delinquency rate increase was driven largely by retail delinquencies.

“The retail landscape continues to gravitate towards online shopping and new companies on the rise that have adapted to modern Millennial trends,” according to Trepp. “While the rush of store closings can be troublesome to retail CMBS loans, these new companies (along with food services), helped these loans post an average occupancy of 94.2% last month, which indicates a sturdy foundation for growth in the retail sector.”