In case you were swamped w Retail Earnings season – you might have missed some of the key callouts from the Mall/Shopping Center REITs. Some key callouts that matter if you care about companies that sell stuff to consumers. Remember that in 3Q the commentary was largely bullish – while in 4Q there was more of a bifurcation between sub-sectors of Mall REITs. Increased bifurcation = increased volatility. Increased vol generally = precursor to change. But all-in, net bullish.
Q4 REIT Highlights
- No shocker here, but Q4 saw improved holiday sales for tenants.
- REITs are still re-leasing expiring leases for higher rents overall, but lower quality space is being leased for less for short terms.
- Bankruptcies and closings having the biggest impact on lower quality malls and strip centers, but there’s been a very dramatic yy change in CH11 filings ytd vs 1Q17. That’s one of the key callouts here.
- 2018 expected to have closings, but the waiting list of new tenants has fallen compared to 2017.
‘A’ Properties (SGP, GGP, TCO, MAC) cautiously optimistic: Quality malls had a better holiday, but ‘consensus challenges’ remain
- Simon Property sales psf +2.3% in Q4 vs. +3% in Q3. Tourist markets improved with some markets that were down in Q3 showing some strength. Occupancy +30bps sequentially. Leasing spread on a TTM basis +11.4% vs. +11.2% in Q3. Noted holiday was strong, but not across the board. Anecdotally January was very strong. Traffic in Q4 was generally positive and up.
- Taubman tenant sales psf +3.2% in Q4 vs. +1.6% in Q3. Average rent psf +0.6%, similar to Q3. Releasing spread +5% in Q4 vs. +6.7% in Q3. Occupancy flat sequentially. Leases signed in the past year with a 2.5 yr term drag releasing spread by 10%.
- General Growth tenant sales were -0.5% on a TTM basis, but increased 0.5% during the holiday (+3.4% ex. Apparel – which is very notable). Rent on a TTM suite to suite basis +13% compared to expiring leases. 40% of leasing activity in 2017 was with apparel retailers vs. 50% in the past. In-place contractual rent growth ~1.5% annually. Fast fashion retailers had sales declines in GGP’s properties in 2017. However, apparel sales for November and December were up 6.9% vs. an overall tenant holiday sales increase of 5.2%.
- Macerich tenant sales psf +4.8% in 2017. At its top 10 malls sales psf +10.4%. Occupancy -40bps YY. Average base rent +3.8%. TTM leasing spread +15.2%. Bankrupt square footage was 850k sf in 2017 vs. 500k in 2016. Takes 6-24 months to replace an unexpected bankrupt retailer, so more optimistic on 2019 and 2020 than 2018.
- Vornado retail occupancy +120bps sequentially. Guided 2018 retail NOI to be at the low end of guidance and decline slightly due to rent reductions to a few properties.
Tenant sales decelerated in Q4 sequentially on a TTM basis which contrasts with the larger story line of a stronger holiday season in 2017 as seen in the chart below:
‘B’, ‘C’, and Outlet Malls – (SKT, CBL): Trading occupancy for rent at lower volume REITs
- Tanger Factory Outlet tenant sales +1%. Increase in renewals for one year in order to maintain occupancy levels. Occupancy -40bps sequentially. For leases renewed in 2017 average rent increase of 8.7%. Blended average rental rate increase of 12.1%.
- CB&L rent psf -5.4% in Q4. New lease rent psf +0.5% vs. renewals -11.1%. Same center mall occupancy -180bps YY, +50bps sequentially. Bankruptcies pressured occupancy by 230bps. Same center sales psf -1.8%. Reducing leases with apparel retailers. Levered tenants expected to continue to pressure rents.
Quality Strip centers: Grocery anchored strips are holding up
- Regency Centers (grocery rent ~14.5% of total) occupancy +30bps sequentially. Same center base rent +3.7% in Q4. Blended rent spread +6% in Q4 for renewal and new leases vs. +7.8% in Q3. New lease spread +2.2% and renewal spread +7.1%. New lease term of 8.4 years and renewal term of 4.9 years both steady during 2017.
Strip centers (DDR) pressured by big box closings: as such more big box retailers looking to reduce leases. Again, common sense here. But sometimes common sense is notable in itself…
- DDR pro-forma new leasing spread of 23.9% and releasing spread of 5.3% in Q4. Occupancy down 80bps YY. Pro-forma base rent +2.9% YY. Noted chopping up big boxes has been successful to re-lease empty boxes, but rarely approached to reduce the size of existing stores.
- Washington Prime base rent +0.2% in 2017. Occupancy -100bps YY. Tenants sales psf -1.4% for 2017. When re-leasing vacated anchor space WPG has increased average sales volumes by 2-3x. WPG’s tier 1 properties are outperforming its tier 2 properties by 8% in Net Operating Income (NOI) growth. WPG believes retail bankruptcy risks are much lower than a year ago.
KSS – Real Estate Optionality Read Through…
- Interesting commentary from DDR provides insight on the feasibility and value of a KSS store reduction/sublease plan.
- The company notes that chopping up big boxes into small ones has been successful to re-lease empty big boxes. However the REIT is very rarely approached to reduce the size of an existing store.
- DDR notes that such a change is “expensive” for the retailers, implying that the risk to sales and the operational disruption of departments battling for space are very costly, let alone any direct capex investment.
- It also includes an unintentional comment about sales transfer, saying “it's very difficult to have that sales volume transition” implying that when a store shuts down to renovate, sales aren’t just postponed, or moved to another store, they tend to disappear.
Full DDR Quote:
Q: The one thing I get maybe more concerned than just pure bankruptcies is as your tenants expire and as [maybe] Staples or Office Depots come back, how much is -- how much of the conversation is, what will renew but only for half the space? And how is that baked into your guidance?
- A: The reality is that reductions in size are somewhat uncommon because it's very expensive for the retailer. It's very hard to relay out of store. And once they have sales in a specific neighborhood, it's very difficult to have that sales volume transition. They're taking some risk. And to date, I would say, unless you disagree, Mike, that the amount of risk that a retailer is willing to take to put their sales at risk is just not happening.
- Right, right. I think the most important thing David had said is that from a retailer perspective, the inside of the store and the layout of the store is incredibly difficult to change for 2 reasons: One, because it's expensive physically; but two, because from the merchandising standpoint, everybody is scraping and clawing for their space. And when you downsize a store, something's got to give. And typically, retailers become very reluctant to downsize. And historically, there's been very few who actually do it. So that conversation doesn't often come into play. Occasionally, it does. But for the most part, it doesn't represent a major proportion of our conversations.
- From a forecasting perspective, it's not really not an issue for 2018, right, because 2018 is all about rent commencements. So those leases, for it to have any impact on our actual results in '18, you can imagine that we signed these leases some time ago. We do our forecast lease by lease, so we already know. And even for leases we haven't signed yet, the leasing team is usually far and advance of those expirations or having those conversations. So we have an enormous amount of transparency on that particular issue for the next 12 months at least.
Ch11 slowing – a lot. Charlotte Olympia – a retailer you’ve probably never heard of (I haven’t) filed this week. Interesting in the cadence of CH11 filings vs this time last year. We’re looking at only 3 filings YTD vs 8 at this time last year. Speaks to the strength of the retail climate – of course. Though clearly manifesting itself is slightly better occupancy, and perhaps less bullish rents (for retailers, more bullish for REITs) than a year ago.
Bankruptcy Chart for Jan/Feb
