Retail REITs Show Continued Weakness

The outlook for retail REITs continues to darken, as shoppers are cutting back on their trips to the mall amid the economy’s struggles. One piece of evidence is Fitch Ratings’ action on Nov. 5, which revised retail REIT Developers Diversified’s rating from stable to negative. . In its recent report on the company, Fitch saw some positives for DDR, such as a strong occupancy percentage in its portfolio and a lease expiration schedule that is manageably staggered. The Fitch report said DDR has actively addressed 2009 lease renewals. But the negative outlook was centered on two major issues: DDR’s leverage ratios, and its liquidity profile. In an economy where many retailers are seeing double digit sales declines from the same period last year, Fitch is focused on two major metrics for retail REITs: liquidity profile and leverage levels. Some retail REITs, due to the strong economy and the abundance of debt in recent year, have greatly increased their leverage levels. “In this more challenging environment, their ability to refinance that debt may cause credit concerns,” said Steven Marks (pictured), managing director at Fitch Ratings. A strong liquidity profile is also a strong positive, Marks said. A retail REIT with a large number of unencumbered assets can use those properties to secure capital in the secured debt markets, Marks said. Also, these unencumbered assets are usually easier to sell, he said. Many retail REITS have problems that may be “issue specific,” according to Deborah Jackson, executive managing director of Weiser Realty Advisors. A REIT that owns a large number of big-box anchored shopping centers, with an anchor such as Home Depot, in a hard-hit housing city like Las Vegas, will feel some pain. But the owner of a center in New England, anchored by a TJ Maxx or a Marshalls, is likely to have a happier story to tell, she said. Retail REITs specialize in different kinds of shopping centers, basically broken into three main groups: regional malls; grocery anchored shopping centers; and big box anchored centers. Regional malls usually attract shoppers who are spending discretionary dollars, so shoppers may cut back on their trips to these locations during an economic downturn, Marks said. Grocery anchored shopping centers are likely to feel less strain, as the anchor depends on necessity-based shopping. A big-box anchored retail center falls somewhere between these extremes, with performance greatly dependent the type of big box. Some retail REITs have positive fundamentals, Marks said, citing Simon’s healthy liquidity profile as one example. And as for DDR, the firm has made some recent prudent moves, Jackson said. On Nov. 6, DDR formed a $62 million joint venture with Cole Real Estate Investments for the ownership of Independence Commons, a 386,000-square-foot shopping center in Independence, Mo. And on Nov. 5, DDR halted construction of a 600,000-square-foot mixed-use lifestyle center in Bloomfield Hills, Mich. “That’s a difficult market to be developing in, with all of the unemployment in the automotive industry,” Jackson said of the Bloomfield Hills project. On the Independence Commons news, Jackson said it is wise for DDR to find joint venture partners with capital to partner with.