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San Diego-Based REITs Maintain Calm Amid Retail Storms

Three Investment Trusts Report Growth in Revenue, Leasing
May 17, 2018
Recent acquisitions by San Diego-based Retail Opportunity Investments Corp. include the King City Plaza shopping center in Oregon, which the company said is under contract for $15.6 million.

Amid the assault from, continued chain-store closures and heightened consolidation among major shopping center owners, three San Diego-headquartered real estate investment trusts appear to be surviving a turbulent retail climate by sticking with tried-and-true property investment formulas.

As indicated in their recent first-quarter earnings reports, American Assets Trust Inc. and Retail Opportunity Investments Corp. (ROIC) are standing by portfolios concentrated in West Coast markets, which generally remain tighter on the supply side than the nation overall, especially in the shopping center and multifamily categories. ROIC is further specialized in grocery-anchored retail properties.

The largest of the three locally-based firms, Realty Income Corp., sports a nationwide, $14 billion portfolio of retail and industrial properties leased out primarily through long-term, triple-net arrangements, where the tenants pay costs like insurance and taxes in addition to the standard rent and utilities. And a large portion of its tenants are Fortune 500 companies and other firms with a global presence in multiple industries, such as Walgreens, FedEx and Walmart.

“We ended the quarter with occupancy of 98.6 percent, our highest quarter-end occupancy in more than 10 years,” said John P. Case, Realty Income’s CEO. The company also found enough investment opportunities to add more than $500 million worth of new properties to its portfolio during the first quarter.

All three companies have portfolio lease-up rates consistently hovering in the 95 to 98 percent range in the past few quarters. All three have also recently been rewarded with continued growth in total revenue and in the metric deemed most important by the real estate investment trust industry - funds from operations - considered a more precise gauge than net income in reflecting a portfolio’s asset depreciation, gains from property sales and other factors that can vary greatly from one reporting period to the next.

For its first quarter ending March 31, American Assets Trust posted total revenue of $80.7 million, up 9 percent from the year-ago period; ROIC reported $74.4 million, up 12.8 percent; and Realty Income reported $318.3 million, up 6.8 percent.

All three reported similar year-over-year gains in their funds from operations - 16 percent for American Assets, topping $32 million; 7.8 percent for ROIC, reaching $37 million; and 20 percent for Realty Income, growing to nearly $225 million.

The sole negative performance metric for the quarter came from American Assets, which reported a net loss attributable to common stockholders of $453,000 compared with net income of $7.4 million a year ago. The net loss was tied to an increase in depreciation expense at its Waikele Center retail property in Hawaii, spurred by redevelopment of a vacated former Kmart space.

American Assets reports gross real estate assets of $2.6 billion, including retail, office, multifamily and mixed-use properties.

Industry experts are expecting current market conditions to remain in place nationally for the foreseeable future, with supply and demand at relative balance in most of the major markets. A recent forecast by the National Association of Real Estate Investment Trusts (NAREIT) anticipates gross domestic product growth of 2.2 to 2.5 percent for 2018, which should support “moderate expansion” in demand for REIT-owned properties.

The Urban Land Institute (ULI) recently noted that, even with modest growth in national GDP, REIT investment returns will likely range from 4.4 percent to 6.5 percent over the next few years.

In terms of investment performance, REITs overall are off to a rough start so far in 2018. The latest data from NAREIT, as of April 30, showed that while U.S. industrial REITs as a group had returned 1.22 percent to investors year-to-date, office REITs in the first four months had a return of negative 6.56 percent, and retail REITs posted a negative 11.17 percent.

Among 30 total retail REITs tracked by NAREIT, those geared to shopping centers were down 15 percent, regional mall REITs were down more than 9 percent, and free-standing property portfolios were down nearly 8 percent.

On a more micro level, the San Diego-based investment companies are standing by strategies that they maintain are holding up well in spite of flux in the larger retail world.

Stuart Tanz, president and chief executive of Retail Opportunity Investments Corp., pointed to continued and accelerating demand for space from “a broad and growing number of retailers” occupying the company’s $3 billion portfolio, which now has 91 centers anchored by grocery sellers.

Tanz said an increasing number of existing, necessity-based tenants at its centers “are proactively seeking to renew their leases ahead of schedule,” which he said suggests the company’s properties in its core West Coast markets have long-term appeal as retail locations.

Lou Hirsh, San Diego Market Reporter  CoStar Group   
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