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Brad Case, Ph.D., CAIA is Vice President, Research & Industry Information for NAREIT, the National Association of Real Estate Investment Trusts ( Dr. Case has been researching commercial and residential real estate markets for more than 21 years and has published articles in... More
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  • 2011 Fitch Outlook for Retail REITs 0 comments
    Dec 17, 2010 1:21 PM | about stocks: SPG, MAC, TCO, CBL, PEI, WPG, O, NNN, GTY, ADC, KIM, FRT, REG, DDR, WRI, ALX, SKT, EQY, BFS, AKR, IRC, RPT, CDR, UBA, KRG, EXL, RPI, EPR

    In its 2011 Outlook for U.S. equity REITs, Fitch Ratings maintains a "stable" outlook for retail REITs, although with differences according to the type of retail space owned:

    Weak consumer demand due to high unemployment levels will fuel a muted economic recovery, pressuring retail REITs' ability to maintain occupancy and cash flow.  Offsetting weak fundamentals, most Fitch-rated retail REITs have improved and stabilized their balance sheets, capitalization, liquidity, and financial flexibility.  Investment-grade retail REITs continue to maintain a strong portfolio of unencumbered assets, which provided a source of contingent liquidity while bond and equity markets were inhospitable.

    Rents will continue to fall as market vacancies are expected to remain protractedly high aggravated by a weak recovery in consumer spending.  The outlook is not even across the retail space, however: Fitch expects strip center owners to be more negatively impacted by weak consumer demand, losing out to large format retail centers, which are expected to have more stable performance due to the strong in-fill locations of their properties and premier tenancy.  Fitch expects that properties located in infill locations with high barriers to entry will outperform properties located in less supply-constrained locations.  Offsetting the significant rent declines over the last four years is the long-term nature of many retail leases, allowing landlords to benefit from slight rent increases upon renewal or new lease signing.

    However, Fitch's rated universe has historically outperformed market averages and should continue to outperform in 2011.  While Property & Portfolio Research (NYSE:PPR) expects the occupancy rate to be 83% by the end of 2011 for the 54 major markets, Fitch expects its rated universe to maintain occupancy in the low to mid 90% range.  Fitch expects the retail REITs in its rated universe will continue to outperform broad market averages.  Large REITs with stable balance sheets and superior assets in desirable locations are able to attract tenants due to strong relationships with national retail chains.
    There are 27 publicly traded retail REITs.  Six of them own regional malls: Simon Property Group (NYSE:SPG), Macerich (NYSE:MAC), Taubman Centers (NYSE:TCO), CBL & Associates Properties (NYSE:CBL), Pennsylvania REIT (NYSE:PEI), and Glimcher Realty Trust (GRT).  Four own free-standing retail properties: Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), Getty Realty (NYSE:GTY), and Agree Realty (NYSE:ADC).  The other 17 own neighborhood centers: Kimco Realty (NYSE:KIM), Federal Realty Investment Trust (NYSE:FRT), Regency Centers (NYSE:REG), Developers Diversified Realty (NYSE:DDR), Weingarten Realty Investors (NYSE:WRI), Alexander's (NYSE:ALX), Tanger Factory Outlet Centers (NYSE:SKT), Equity One (NYSE:EQY), Saul Centers (NYSE:BFS), Acadia Realty Trust (NYSE:AKR), Inland Real Estate (NYSE:IRC), Ramco-Gershenson Properties Trust (NYSE:RPT), Cedar Shopping Centers (NYSE:CDR), Urstadt-Biddle Properties (NYSE:UBA), Kite Realty Group (NYSE:KRG), Excel Trust (NYSE:EXL), and Roberts Realty Investors (NYSEMKT:RPI).

    The Fitch coverage universe includes nine retail REITs: SPG, O, NNN, KIM, FRT, REG, and DDR along with Entertainment Properties Trust (NYSE:EPR), which NAREIT classifies as a "specialty" REIT, and Centro NP LLC.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Author is long Vanguard REIT Fund and ING Real Estate Fund.
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