Shopping Centers Today

OCT 2018

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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Page 30 of 59

The prevailing narrative may be that retail is in trouble, but performance metrics for retail REITs hardly look apoc- alyptic. In a second-quarter REIT industry tracker report published in August, NAREIT cites retail REITs' rising funds from operations, their healthy same-store net-operat- ing incomes and their record occupancy rates as being signs of strength. "The REITs have generally done much better than the average property owner," said Calvin Schnure, NAREIT's senior vice president of research and economic analysis, who authored the report. "The types of locations that the REITs tend to own really are more at the top of the market. Most REITs have made a deliberate choice to hold newer, higher-quality properties in markets with rapid wage growth, higher incomes and dense populations. It has protected them." But this does not mean that retail REITs are completely unaffected by the "retail apoca- lypse" story line. Jitters about the rash of store closures involving The Bon-Ton Stores, Sears, Toys 'R' Us and others, combined with long-standing concerns about competition from the e-commerce side, continue to be a drag on retail REIT share prices, observers say. The perception is also driving the extraordinary dichotomy between asset prices in the private market and those in the public sector, a major constraint for today's retail REITs. "There's a big disconnect right now be- tween public and private pricing," said Conor C. Flynn, CEO of Kimco Realty Corp. "Our share price is trading at north of a 20 percent discount to our net asset value, and yet, on the private market you can sell shopping centers at very strong cap rates." Jeffrey S. Edison, chairman and CEO of Phillips Edison & Co., says the gap is among the widest he has seen in his 25 years in the grocery-anchored shopping center business. "Rarely do you see a time where your operating results are really positive — very, very strong numbers — and yet the public markets are seeing them as something that should trade at a huge discount to what their net asset values are," said Edison. "Both markets are looking at the same set of facts very differently. Obviously, somebody is wrong." As Schnure sees it, context is everything. "There is a huge difference between retail stores and retail properties," the analyst said. When large-format operators like Bon-Ton 6WRUHVRU7R\Vµ5¶8V¿OHIRUEDQNUXSWF\DQGVKXWWHUVWRUHV some observers wrongly assume that all landlords will be equally affected, he says. Having carefully posi- tioned their portfolios for years with an emphasis on high-quality assets, many retail REITs have an edge ZKHQLWFRPHVWR¿QGLQJUHSODFHPHQWWHQDQWV notes Schnure. "Many times there are new companies coming along just lined up to take these spaces, at least in the high-productivity malls and attractive areas," he said. "The occupancy rate at REIT-owned properties remains quite high, in the mid-90 per- cent [range], which might seem really VXUSULVLQJWRVRPH7KH5(,7VDUH¿QGLQJ new tenants for these spaces." This is probably to some extent a reason retail REIT earnings, which had suffered a setback in part because of these store closures, rebounded during the second quarter, says Schnure. "The retail store that is selling to the public may go bankrupt and vacate space, and so the property owner, the REIT, may lose income for a couple of months until it gets somebody into that location," he said. "But eventually, their business model just keeps moving forward. Many times they are able to lease the space at a higher rate than before." According to the NAREIT second-quar- ter report, retail REIT funds from opera- WLRQVURVHE\SHUFHQWUHODWLYHWRWKH¿UVW quarter, even as same-store net operating income increased by 1.9 percent relative to the year-ago quarter. The jump was notable among regional malls, which delivered FFO JURZWKRISHUFHQWRYHUWKH¿UVWTXDUWHU "The REITs tend to own the A-minus-qual- ity or the B-plus malls in cities with strong GROWTH FOR O C T O B E R 2 0 1 8 / S C T 31

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