Why Shopping Center REITs Can Withstand Coronavirus Earnings Hit
- Aug 19, 2020
The shopping center REITs that Moody’s rates own and operate high-quality real estate portfolios; 89 percent of the REITs are grocery-anchored focused, with average grocer sales ranging from $570 to $712 per square foot—well exceeding the national average of $450 per square foot. The highly productive grocery stores highlight the quality of the operators, underpinning the likely durability of the shopping centers during and after the pandemic. These centers focus on nondiscretionary spending. Consumers will also be more inclined to pick up nonfood items while shopping for essentials, boosting overall sales for other tenants. This is a key advantage of being a tenant in a grocery-anchored shopping center.
The shopping center REITs have substantial liquidity comprised of cash on hand (and cash equivalents) and their revolver availability, compared to the relatively modest debt maturities through the end of 2021. Most REITs have either partially or fully drawn down their revolvers out of an abundance of caution, and carefully managed all future capital requirements, including redevelopment/development spend, property-level expenditures, as well as general and administrative expenses and dividend payments. While REITs are required to distribute 90 percent of their taxable income to shareholders annually in the form of dividends, REITs can satisfy this requirement with stock dividends, which would further enhance the REIT’s flexibility.
Some of the REITs have further enhanced their liquidity profiles by issuing bonds to shore up their available cash. Interest coverage and leverage metrics are weaker as the REITs boosted their debt levels while their net operating income fell, leaving them with less resources to pay interest on the growing debt burden. However, the REITs refinanced their debts at historically low levels entering this pandemic, leaving most of them with ample cushion in the fixed charge coverage. The concern is also mitigated by the fact that some of the shopping center REITs used the bond proceeds to pay down their revolvers.
Moody’s expects vacancies to rise in the next 12 to 18 months, putting pressure on re-leasing spreads. Many nonessential retailers, restaurants and local tenants have requested rent relief. These are the sectors that are most at risk in the pandemic disruption and may take longer to recover. Some of them do not have the financial flexibility to remain solvent through the pandemic. Moody’s expects shopping center REIT landlords to choose to maintain occupancy and bridge their tenants to the other side of the pandemic, especially those with sound business plans and long operating track records, at the expense of more flexible rent collection terms, and favorable lease modifications, such as switching to percentage rents from base rents and, in some instances, rent abatement.
Location, Location, Location
Nonetheless, many states have reopened some or all retail and restaurants with varying restrictions. There has been pent-up demand for many categories including personal services such as hair, nail and spa. Most shopping center REITs rated by Moody’s have these types of tenants in their properties, adding more foot traffic while increasing sales within their properties. Moreover, e-commerce will continue to accelerate in this stay-at-home period of the pandemic, but the lion’s share of e-commerce deliveries is originating from the store base. We expect curbside pickup and click-and-collect will be trends that will continue to accelerate during the current pandemic and post-pandemic, continuing to benefit Moody’s rated grocery-anchored REITs. That, in turn, validates the importance of the omnichannel strategy and the importance of having the good physical location close to consumers that rated shopping center REITs possess.
Thuy Nguyen is a vice president-senior analyst with Moody’s.