While still cautious and subdued, the commentary shared by retail REIT executives during the past few weeks of investor conference calls discussing third quarter financials was markedly more upbeat than in the previous two quarters.
Overall, REIT executives seem generally pleased with their successes in de-leveraging portfolios. Whether this was accomplished through issuing more stock, securing new debt, negotiating with lenders or completing joint venture transactions and asset dispositions (in most cases, a combination of all), most REITs have managed to relieve a significant amount of their financial burden.
For a review of some recent major retail property transactions, click here.
Of particular note, however, is that the majority of retail REIT executives seemed pleased to report an uptick in leasing activity during third quarter, and remain hopeful that it will become a stronger trend in 2010 and beyond.
Among the major retail REITs noting a more positive level of leasing activity were the following:
- Simon Property Group (NYSE:SPG) said that while leasing activity was up from last quarter, it was still down in comparison to third quarter 2008. As of October 30, Simon had over 500 deals totaling 8 million square feet of leases in process. Since mid-July, the company has completed 20 big box deals and had 20 to 30 more in the pipeline.
- Weingarten Realty Investors (NYSE:WRI) executed 176 new leases and 217 renewals during third quarter, which is significantly up from activity in the same period last year.
- Macerich (NYSE:MAC) said third quarter leasing activity on its specialty retail space was up about 10.5% over last year.
- Developers Diversified signed 146 new leases and 287 renewal leases during third quarter.
- Regency Centers (NYSE:REG) signed 1.4 million square feet of new leases and renewal during third quarter. COO Mary Lou Fiala said she observed leasing activity pick up dramatically since June, with the number of leases per month representing an increase of nearly 60% from levels earlier this year.
Beyond these general leasing statistics, retail REITs addressed re-leasing activity on the spaces that had been vacated during the rash of retailer bankruptcies and store closings during this recession.
- Cousins Properties (NYSE:CUZ) said it had re-leased 83% of the vacant space created from big box bankruptcies in its portfolio to date.
- Pennsylvania Real Estate Investment Trust (NYSE:PEI) said that of the 627,000 square feet of space that was vacated by bankrupt tenants, it has re-leased 51% and has another 11% out under Letter of Intent (LOI).
- Weingarten said that during 2009, it has had 42 big box tenants vacate and has completed only 16 leases backfilling these spaces, but has another 10 in various stages of negotiation.
- Developers Diversified said that currently, it has "real activity" on over 55% of spaces formerly occupied by bankrupt retailers. "We are gaining traction as retailers firm up their 2010 and 2011 opening plans," said Chairman & CEO Scott Wolstein.
In looking at the retailers signing new leases during third quarter, Weingarten said, "we are continuing to have success leasing shop space to restaurants, medical services, health and wellness and personal service retailers." Regency Centers said small shops are accounting for the majority of leasing activity. By category, the company said food and restaurant tenants have been most active.
For inline space at malls, Simon's Chairman & CEO, David Simon said, "Retailers have started to gain their footing and certain retailers are growing store counts including Aeropostale, Gucci, Apple, the Buckle, California Pizza Kitchen, Fresh, Michael Kors and Red Robin, to name a few." At its malls, Macerich additionally identified 7 for All Mankind, True Religion, Banana Republic, Love Culture, Burberry, CB2, Nike, and Crazy Eights (Gymboree's new concept) as signing leases.
Of more significance, noted REIT executives, was an improvement in leasing activity at vacated big box spaces. Steve Sterrett said that Simon has found "a lot more interest in the boxes that have become available" of late, concluding that big box users are showing a "a flight to quality." He explained, "What we’re seeing is that these big box users now understand that they are going to be at an advantage by getting the incremental traffic that they get in a [mall] while still having their own entrance and parking and visibility, as opposed to being in smaller strip centers."
A number of active big box users were identified, not only for mall space, but also within community and neighborhood center REIT portfolios. Forever 21, H&M, Bed Bath & Beyond and hhgregg were noted several times, with other mentioned including I.O. Metro, PetSmart, Dave & Buster’s, Best Buy, Christmas Tree Shops, Neiman Marcus Last Call, Hobby Lobby, Kohl’s, Jo-Ann Stores, Dollar Tree, TJ Maxx, Marshalls, Home Goods and A.J. Wright.
Leasing agents have been working very hard, and creatively, to secure this leasing activity, however, said REIT executives. Simon said the company's agents are "hitting the streets and scaling the country looking for growth tenants." Sterrett added, "We have been aggressively canvassing all of the properties in our markets, because we think this is about market share and we believe there are many compromised properties operating in the same markets as ours…we want to bring [those] tenants into our properties."
Developers Diversified said its new business development team got creative by creating revenues from temporary and seasonal leasing in both big box and in-line spaces. Specifically, the company signed 84 leases with Halloween concepts, which generated $8.4 million in ancillary revenues during third quarter, which helped to mitigate lost rental revenues and further declines in NOI from related retailer fallout.
In any case, REIT executives are encouraged by a general improvement in retailers' sentiment, with most major retailers planning to pick store growth back up in 2010 and more so in 2011 -- however, a cautious attitude still remains.
Sterrett said that retailers’ attitudes toward expansion are improving. "The good news is that, and this is no guarantee, but the mood from our clients is better and they’re thinking more about 2010. Hopefully, they’ll have a positive holiday season and the store count will grow in 2010, but there’s still a level of uncertainty out there."
Rick Sokolov, President and COO at Simon, said that retailers' focus on cutting back costs and improving margins, as opposed to increasing sales, results in improved cash flow, which "leads to capital allocation for new stores or remodeled stores upon renewal. " He explained that in 2009, retailers were so unsure about their credit lines and ability to finance that they were preserving their cash and said, "now that they have better cash margins and better cash on deposit, we’re now hearing that they are allocating money for new" stores.
"Retailers are hitting their plan and they’re able to make some money. I think things, particularly for the moderate-to-budget priced retailers, weren’t quite as bad as they wanted everyone to think they were. I think they’ve figured out how to operate in this environment and as a result, they’re trying to take advantage of the fact that they have a significant amount of leverage. In some cases, for the first time in the history of their company, some retailers don’t have any major national competitor competing with them for space. And they’re taking full advantage of that," said Daniel Hurwitz, President and COO at Developers Diversified.
"Conversations with retailers are clearly better than they were last quarter; a lot better than they were in the first quarter; and of course in the fourth quarter last year it wasn’t even worth taking the call. So I think we’re seeing some positive traction and we’re encouraged by it, said Hurwitz. He added that if this Holiday season turns out positive, there is a good chance that some retailers could move up their opening dates on some committed spaces, or increase their expansion plans marginally.
Art Coppola, Chairman & CEO at Macerich, said that while retailers' sales are still down significantly, the figures are coming in at expectations; that, combined with managing margins well, has "put retailers in a mood where they're willing to talk about new leasing. They went from being in a freeze mode in the fourth quarters of last year, to fall out in the second quarter of this year and now we're having conversations with our retailers about how they can grow their business."
For the first half of 2009, the volume and pace of retailers requesting rent relief requests from retail landlords garnered much attention and concern in the industry. On top of this, landlords have had to lower market rents to secure new tenants. Retail REIT executives noted that while rent relief requests granted and lower market rent caused a dent in the rent metrics reported during third quarter, conditions are improving.
Anecdotally, Sokolov said that there had been "several instances" of retailers that requested rent relief and lease modifications from Simon during second quarter, coming back to the company in the third quarter and saying, "Looks like we're okay; we don't need anything; we're going to make it."
Hurwitz said that Developers Diversified had received a significant amount of rent relief requests to date. Specifically, the company had received 953 formal requests from tenants (its portfolio contains 13,000 to 14,000 tenants), with about 43% of those coming from the southeast. Of those 953 requests, the company granted only 41, with the average concession representing a 22% discount off base rent for a period of one year -- the tenant converts back to full rent after the year. The good news is, said Hurwitz, "the velocity has slowed dramatically of requests coming onboard."
"The rent relief requests are way down. If you look at what we have gotten this quarter, its about 50% less then the rent relief requests from last quarter and about 75% lower then what they were in the first quarter so they’re down dramatically," said Brian Smith, Regency's President & CIO. On market rent, he commented, "In most markets rents are at or approaching the bottom. When we compare today’s rents with rents on the leases that expire during the next few years, it appears there is minimal if any, downside in the overall portfolio."
Johnny Hendrix, Executive Vice President at Weingarten commented about the fluctuations in market rent trends during this year. "In terms of the roll downs of market rent, we are already seeing that getting a little bit better. During the first quarter, we were probably looking at rents for the boxes at about 30% down. Today, we're seeing that more in the 15% to 10% down range. You're probably looking at about the same difference in the shop space. I think you're going to see a continued roll down of rents through 2010 and maybe even into the beginning of 2011. I think that's probably the point where we start picking back up." Hendrix added that while base rents are down, rent breaks in the form of free rent other incentives are few and far between.
One of the reasons the rental rate and leasing activity picture is beginning to improve is because retailers looking to expand have very few options in the form of brand new development projects on the table, said retail REIT executives. With little to no significant new retail development set to break ground for the remainder of this year, or even next, many retailers will be in a position of competing for existing vacant space at shopping centers.
Simon said it continues to have a moratorium on ground-up new development, with the exception of outlet centers. The company plans to construct an outlet center in Merrimack, New Hampshire next year.
Macerich said that any development activities it takes on in the near future would most likely be redevelopment and expansion projects. "It’s something that we will tap into when the markets are much more robust and the time is right and we have plenty of free capital to go ahead and tap into it," said Coppola.
Developers Diversified said any chance of the company commencing on new greenfield development in the near term is quite a ways off. "To justify new development I would say [the return] would have to be north of 12% and we’re not going to see that in the domestic U.S. for quite a while," said Hurwitz.
Looking ahead, retail REIT executives shared their expectations for the industry in the near term and beyond.
"While many have declared the recession over, I can assure you that the joy is not universally felt across Main Street. Various economic and unemployment uncertainties remain for the consumer, particularly as we head into this holiday season," said Daniel Hurwitz at Developers Diversified.
David Simon said, "I think corporate America is on the verge of starting to hire again and to employ capital which will lead to job growth, so there is a reasonable chance that we will be in a much better job picture in 2010. [However,] retail lags. I think 2010 will continue to be a tough environment and we could have a better 2011-2010 then what we might feel like today."
Johnny Hendrix at Weingarten said, "Most economists project that the overall employment situation will begin to improve by the second quarter of 2010. Our expectation is that retail sales across will remain at current levels until consumers begin to feel more comfortable with their jobs and income status, which will then provide a platform for increasing sales for retailers."
Larry Gellerstedt, President & CEO of Cousins said, "We are starting to see reports every day that the economy may have bottomed out and at least technically, the recession has ended. And it is certainly good after this long period of time to have some upbeat economic news, but the real estate sector has always lagged the overall economy and we certainly don’t expect this cycle will be any different. We do see things that appear to be stabilizing in our key markets, but we anticipate the 2010 will be another challenging year."
Drew Alexander, President & CEO of Weingarten said, "we are seeing positive signs of stabilization on the horizon. [We] are not completely through the storm, but we feel we are through the worst of it."
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