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Category: Capital Markets, Leasing Tags: REITs

REIT Earnings Report for Q4

Patience & Discipline is the Key Trend with Publicly Traded REITs

Over the last few weeks, open-air shopping center REITs hosted their quarterly earnings calls to discuss Q4 earnings, highlight 2022 overall performance, and issue guidance on expectations for 2023.  Several REITs reported better-than-expected earnings, primarily due to strong leasing demand, and are issuing guidance with continued NOI growth.  Almost all the REITs echoed the same sentiment regarding their 2023 market expectations; the plan is to remain patient and disciplined as the current bid/ask spread between buyers and sellers remains wide.  As the cost of capital has increased, owners are tightening their buying criteria and increasing their targeted returns in order to protect their downside risk.  Both Brixmor and Phillips Edison mentioned on their earnings call that they have increased their hurdle rate, as Phillips Edison now requires a 9% unlevered IRR on their underwriting.  Kimco mentioned that they’re looking to purchase assets in the low-6 cap range, which is almost 100bps higher than where it was a year ago.


Many REITs believe the first half of the year will remain slow from a transaction standpoint and then pick up in the back half of the year as the bid-ask spread slowly narrows.  While transaction activity hopefully picks up, it’s unlikely that any publicly traded REITs will be in a position where they need to enter a ‘fire-sale’ scenario, as many of them have strong balance sheets and are well positioned to weather a moderate downturn.  RPT, a REIT based out of New York, has no debt maturities for the next two years.  Likewise, Regency Centers does not see a need to access the capital markets this year as they have no unsecured debt maturities until mid-2024.  Several of the REITs have low exposure to variable rate debt.  SITE Centers’ variable debt is only 2% of its total debt, while 97% of Acadia Realty’s core portfolio is fixed-rate debt.  Despite boasting a strong balance sheet, Kite Realty Group mentioned they are pursuing alternate solutions to satisfy their remaining 2023 maturities, such as selling properties rather than accessing the debt markets.


Although the public REITs appear stable, it could be a different story in the private sector.  Brixmor expects to see opportunities from the private equities market as some private owners may be higher levered and forced to sell due to upcoming debt maturities.  Due to redemption requests and withdrawals, Kimco also anticipates conversing with private REITs and pension funds in liquidity crunches. Acadia Realty believes that fatigue could also play a factor and cause private landlords that lack tenant relationships to choose to sell properties rather than deploy capital to try and backfill or redevelop the space.


Regency Centers is not guiding to any acquisition activity, but they are looking to trim some of their lower-performing centers as they’re guiding to ~$65M worth of disposition activity with an anticipated weighted average cap rate of ~7%.  RPT doesn’t anticipate any transactions this year but states they will remain opportunistic.  Kite Realty & Urban Edge aren’t anticipating being overly active in the markets as they expect any acquisition activity to be earnings neutral to their disposition activity.  Kite Realty mentioned that they are focusing on allocating capital to lease space rather than acquisitions since they feel it’s a better risk-adjusted return given the state of the market.  Federal Realty also mentioned that they don’t anticipate being active in the transaction markets this year.  Kimco is guiding to $100M worth of acquisitions, net of disposition,  while Phillips Edison (PECO) is guiding to $200-$300M of acquisitions, net of dispositions.  Retail Opportunities Investment Corp (ROIC), a REIT that invests exclusively on the West Coast, is anticipating $400-480M of acquisitions, net dispositions, and is anticipating roughly 70% of that to occur in the back half of the year.


Transaction Activities

Despite the sticky markets, some notable transactions occurred in Q4 and after year-end.  Kimco sold two assets in Savannah, GA, and 1031-exchanged them into purchasing the remaining 85% interest in two of their Southern California assets.  The demographic profile of the SoCal assets includes a 3-mile population of ~200k and an Average Household Income of ~$120k.  They believe that the growth profile of the two Southern California assets will far outpace the Savannah assets.  Kimco also acquired a grocery-anchored portfolio consisting of 8 centers in Long Island, NY, for $375M.  They purchased the deal from a private owner and used a combination of cash & assumable financing to get the deal done.  Phillips Edison bought 2 value-add grocery-anchored centers in Q4, one center in Sacramento, CA, which was 84% occupied, and the other in Louisville, KY, which has near-term mark-to-market opportunities.  Subsequent to year-end, they bought Providence Commons (Nashville MSA) for $27.1M.  Acadia Realty bought 330 River Street (Boston MSA) in 2012 and, throughout their ownership, worked to extend the Whole Foods & Rite Aid lease term.  They also increased the credit profile of the remaining tenants which allowed them to sell in Q4 2022 for $26.4M (a sub-5 cap rate).  RPT Realty closed on two Midwest assets (Detroit & Columbus MSAs) which helped fund their purchase of the previously acquired Mary Brickell Village in the heart of Miami, FL.  Subsequent to year-end, Federal Realty acquired Huntington Square in East Northport, NY, for $35M.  They already own the adjacent center, so purchasing the AMC & At Home anchored center gave them full control of the site.  SITE Centers continues their focus on smaller neighborhood convenient strip buildings rather than larger anchored centers, as they believe these are the most liquid, have minimal CAPEX requirements, and attract long-term high credit tenants.  They purchased two convenience assets subsequent to year-end for $26M and have another $75M of convenience assets awarded or under contract that are expected to close by the end of June.  The convenience assets now make up roughly 10% of their portfolio.  Brixmor didn’t acquire any assets in Q4 but sold 5 properties and 3 partial properties throughout North Carolina and the Midwest.  After year-end, they sold 2 more centers and 1 partial center totaling $25.9M.  ROIC, Urban Edge, & Kite Realty group remained sidelined and did not have any transaction activity.  The STNL REITs were also very active as Realty Income acquired 445 properties for $3.5B at a cap rate of 6.2% and a WALT of 21 years.  224 of these properties consisted of a dental practice portfolio.  National Retail Properties acquired 69 properties at a cap rate of 6.6%, Agree Realty acquired 131 properties for a cap rate of 6.4%, NETSTREIT acquired 23 properties for a cap rate of 7%, and Alpine Income acquired 7 properties for a cap rate of 7.4%.  The focus for most of the STNL REITs, regarding their acquisitions, was ensuring they were targeting high-quality and investment-grade tenants to add to their portfolio.


Leasing Activities

Although the transaction market has been in a downtrend, leasing activity has been stronger than ever, as several REITs reported some of their highest occupancy rates on record.  Kimco grew its portfolio occupancy to 95.7%, a year-over-year increase of 130bps, one of the company’s largest gains.  Realty Income achieved a property-level occupancy of 99%, its highest level in 20 years.  Kite Realty reported a leased rate of 94.6%, which is a 120bps year-over-year increase, while Urban Edge saw a 110bps year-over-year increase bringing their portfolio leased occupancy up to 95.4%.  Nearly all the REITs have reported that their leasing activity has shown no indication of slowing down as their pipeline remains robust thus far in early 2023.  Owners believe that the high leasing volume is due to various reasons.  It’s generally believed that any impending recession or economic slowdown will be short-lasting and relatively shallow; due to this, retailers don’t want to get caught sitting on the sidelines and miss the potential upswing during the recovery phase.  As a result, retailers are currently focused on building out and opening stores.  If a recession hits, they believe that it will be shallow enough that they can sustain any hardships and then be well-positioned to capitalize when consumer confidence returns.  Also, most of the supply chain headwinds that retailers faced due to COVID are either gone or stabilized, so now retailers can focus on allocating capital to opening new stores.  Lastly, several REIT owners mentioned that there’s a lack of good retail real estate, which has created a huge demand for retailers to act, and ensure they’re located within the main retailer corridor to capitalize on high traffic volume.  Federal Realty was adamant that their strong leasing activity and overall performance were due to the strong demographics surrounding their centers.  The more discretionary income families have, the more money they can spend at their centers.  This leads to tenants outperforming their store sales projections and ultimately allows landlords to justifiably raise rents and grow property NOI.  Phillips Edison also isn’t worried about any impending recession, as 70% of their rents come from necessity-based goods & services that are less impacted by macroeconomic pressures.  ‘Medtail’ (medical retail) continues to be the hottest sector absorbing vacant spaces.  This category, including eye care, dentists, dialysis centers, physical therapy, etc., has finally realized the benefits of a retail setting.  Being in convenient locations close to consumers while simultaneously increasing brand awareness to other shoppers has caused a boost in popularity.  Heath & wellness (med spa, massage, etc.) and QSRs (Chick Fil A, Shake Shack, etc.) are also full steam ahead and performing well in retail centers.  Discount retailers such as TJX, Ross, Five Below, etc., continue to thrive in the current economic environment.  Bed Bath & Beyond (BB&B), Party City, Regal Cinemas, & Tuesday Morning were all talked about on the earnings calls, as these tenants have either filed for bankruptcy or are currently on their last breath.  Several REITs have exposure to these tenants but aren’t losing sleep over seeing them exit their centers.  In fact, in most cases, they are chomping at the bit to get the spaces back so they can backfill them with better tenants at higher rents.  Kite Realty already has two Party City spaces leased and ready to be backfilled by PoPshelf.  Brixmor already has four of its eight BB&B spaces at LOI, while Kimco has two of its BB&B spaces at LOI.  Many of these spaces plan to be released at double-digit rent spreads; Brixmor thinks their spreads on these spaces will be closer to 60%.  Overall, it was reported that foot traffic at centers is the highest that it’s ever been, continues to see growth, and that brick & mortar retail is crucial for retailers to provide multi-channel fulfillment to customers.

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