REIT Earnings Report for Q1 2023
Record Leasing Helps Bolster Strong Operations, but Transaction Market Remains Sticky
The open-air shopping center REITs recently wrapped up their first round of earnings calls for the 2023 calendar year. The overall takeaway was that leasing and operations remain strong while the transaction market remains challenged. Similar to the prior quarter, many REITs reported better-than-expected earnings. As a result, many raised full-year guidance as they anticipate operations to remain strong through the back half of the year. The strong results stem from solid leasing demand, partly due to a lack of good retail supply. This lack of supply has allowed operators to push a premium for market rents.
In the first quarter, Brixmor increased its small shop occupancy to 89.3% and grew its portfolio leased occupancy to 94%, a record for the company. Federal Realty has yet to see any leasing slowdown; their leasing activity is currently exceeding historical levels by 20%-30%. Phillips Edison executed 263 new leases totaling 1.1M square feet in the first quarter, which helped bring their leased portfolio occupancy to a record high of 97.5%. Retail Opportunity Investment Corp. (ROIC) increased its portfolio lease rate to 98.3%, which it stated was a company record. Even after reporting record-high leasing numbers, many REITs believe there’s still plenty of room to run, as leasing demand remains strong and leasing pipelines remain robust. According to Regency Centers, the strong leasing demand isn’t isolated to any specific geographic area, and they are still experiencing strong demand across many regions and sectors. They also mentioned they do not see pushback from tenants as they continue to increase rents and embed annual rent steps within their lease negotiations. Even with the mark-to-market rental increases, their tenants seem to be operating at healthy and reasonable levels. Acadia Realty reported that many of its tenants are seeing record store sales at their locations. According to Site Centers, the ‘work-from-home’ trend has customers visiting their properties more frequently and spread evenly throughout the week compared to pre-pandemic levels.
While operations remain strong, the transaction market remains challenging as many REITs either sit on the sidelines or only transact when necessary. Phillips Edison was one of the few open-air operators that went on a buying spree in the first quarter. The company purchased four Publix anchored centers for a total of $78.7M. The list of locations included Providence Commons (Nashville MSA), Village Shoppes at Windermere (Atlanta MSA), and two South Florida locations: Town Center at Jensen Beach and Shops at Sunset Lake. The four acquisitions were reportedly purchased at a weighted average cap rate of 6.3%. PECO believes the acquisitions will drive incremental earnings growth through either lease-up or development potential, allowing them to achieve their 9% unlevered IRR acquisition hurdle. They also reported that all deals had motivated sellers, which helped move things across the finish line. Despite being active in the first quarter, they expect to be more muted in the second quarter. Site Centers was also active in the first quarter as they closed on two previously announced convenience centers in the Denver and Baltimore MSAs for $26.1M. After quarter end, they purchased Barrett Corners for $15.6M, a 19k square foot convenience center in the Atlanta MSA. Even though the acquired convenience centers were 100% occupied, they are in wealthy suburbs and contain shorter WALTs. SITC believes there are strong mark-to-market opportunities when it comes time to renew the current tenants. This will allow them to achieve NOI CAGRs (compounded annual growth rate) higher than their overall portfolio. Kimco took a strategic route on their acquisitions for the quarter, as they closed on the remaining 85% interest from joint venture partners in three California grocery-anchored centers for a price of $127.5M, which equated to a blended cap rate of around 6%. They also acquired adjacent parcels at existing shopping centers at Stafford Marketplace (Stafford, VA) for $12.5M and Crossroads Plaza in Cary, NC for $2.1M.
Despite not having any acquisitions in the first quarter, Brixmor was very active on the sell side. They completed $124.6M of dispositions, comprising six shopping centers and two partial centers. The assets they sold were stabilized properties that they spent time backfilling throughout the years, and didn’t see any further internal growth opportunities. Their strong balance sheet puts them in an excellent position to unlock value-add acquisition opportunities, but they believe the market is still in transition and plan on being selective. Kimco sold three power centers and two land parcels for $98.9M. Much like Brixmor, the power centers they sold were maxed out on their growth potential. Federal Realty sold Town Center of New Britain in New Britain, PA, for $13.2M. They stated this was an obvious disposition candidate as it contained one of the lightest 3-mile population demographics within their portfolio. Federal has a list of assets they want to sell and recycle into new assets but are waiting for more stability and a better understanding of general market conditions. Kite Realty, Regency Centers, and Urban Edge had no transaction activity in the first quarter, stating market volatility and a lack of attractive opportunities.
The STNL REITs were active during the first quarter, as juggernaut Realty Income led the way with 197 U.S. acquisitions totaling over $1 billion. The average weighted cash yield on their U.S. acquisitions was 7%, with an average WALT of 10 years. They disposed of 26 vacant properties for net proceeds of $28.59M. Most of their dispositions were purchased by local buyers that plan on operating out of the space. Agree Realty purchased 66 properties across 24 different states within various sectors, including tire & auto services, home improvement, grocery stores, dollar stores, and farm and rural supply stores. The properties were acquired at a weighted-average cap rate of 6.7% with a WALT of 13.1 years. Improving their tenant profile continues to be their focus, as 75% of annualized base rents acquired were generated from investment-grade retail tenants. They also mentioned that a few days before their earnings call, they executed roughly $100M of high quality assets at attractive cap rates. NNN REIT, Inc. purchased 43 properties at an initial cash cap rate of 7% and a WALT of 19 years. They used their free cash flow to fund roughly 31% of their acquisitions. They also sold 6 properties at a blended cap rate of 6.6%. NETSTREIT acquired 20 properties for $67.7M at a cash yield of 6.9% and a WALT of 9.4 years. Of the acquisitions, 78.4% were investment grade tenants, and 16.6% were privately held companies but of investment grade profile. They also completed 8 dispositions for $15.9M, equating to a 6.8% cash yield. Alpine Income Property Trust did not acquire any properties and sold 10 properties for $56.2M at an average exit cap rate of 6.1%.