Several retail real estate investment trusts (REITs) reported their third-quarter results over the past couple of weeks. A few recurring themes popped up in those reports, giving real estate investors a glimpse at what seems to be ahead for the retail sector. Here's a look at what some of the largest retail REITs had to say about the future of retail.
Getting back to normal
Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU), one of the largest owners of high-quality U.S. shopping malls, "saw a marked improvement in the third quarter over the prior three months, and cash collections are once again nearing normal levels," according to CEO Brian Kingston in the quarterly shareholder letter. He also noted that the company was making progress in its negotiations with tenants who couldn't pay their rent during the second quarter. The company believes "any significant impact will be isolated to" that period. Further, he noted that customer traffic had also improved, "returning to 65% to 70% of normal in the third quarter."
Leading grocery-anchored shopping center owner Kimco Realty (NYSE: KIM) also reported that rent collections were approaching more normalized levels. It collected 89% of the rent it billed during the third quarter, up from an initial collection rate of 70% during the second quarter. While a string of retail bankruptcies hurt occupancy, CEO Conor Flynn said in the third-quarter earnings release, "Our leasing volume and spreads for renewals and options remain at or above pre-pandemic levels, and we're encouraged by the growth in our leasing pipeline for new leases, led by grocers and other essential retailers." These improvements gave Kimco the confidence to reinstate its quarterly dividend, albeit at a lower rate.
One reason retailers can pay their current and back rent is that retail sales have rebounded sharply. Brookfield's CEO noted that "tenant sales have similarly recovered and in certain segments are experiencing stronger sales versus this time last year." He pointed out that some of the best performing categories were luxury fashion and jewelry, with year-over-year sales growth of 36% and 13%, respectively. However, he noted that the strong performance "is not isolated to luxury…as sales for retailers with broad appeal including Pandora and American Eagle Outfitters (NYSE: AEO) are likewise growing." Further, he wrote that "sales at large-format box retail stores are also up 14% year-over-year, a testament to the strong, evolving one-channel capabilities of retailers in this category."
Leading mall REIT Simon Property Group (NYSE: SPG) also noted that retail sales at its properties were improving. CEO David Simon said on the third-quarter conference call, "We are pleased to report shopper traffic and total sales volume continue to improve with each sequential month and throughout the third quarter." While sales at its properties were still down 10% year over year, that's due to mall closures in California because of renewed restrictions and some tourism-related impacts in Orlando.
Online is going omnichannel
Retail REITs have been under lots of pressure over the last few years because more consumers are shopping online. That's causing physical retailers to close stores and go bankrupt, impacting occupancy levels at malls and shopping centers.
However, that space isn't staying empty for long. Simon's CEO noted that "demand for space in our premium outlet portfolio has been really strong with the space that has become available as a result of recent tenant bankruptcies."
According to Brookfield's CEO, one of the drivers is that "digitally native retailers continue to expand their physical footprint and overall offerings." He noted that Amazon (NASDAQ: AMZN), for example, recently opened its 27th 4-star concept at one of its malls. Not including Whole Foods, the e-commerce giant now has more than 80 physical stores -- when adding in its bookstores, Go, and Fresh concepts -- with plans to open more. David Simon also noted that "internet-oriented companies" want "to grow their footprint" by opening more physical locations.
Rumors of retail's demise seem greatly exaggerated
Conditions in the retail sector turned apocalyptic during the second quarter when governments forced nonessential stores to close their doors. That had a trickle-down effect since they couldn't pay their rent, which impacted retail REITs, forcing many to slash or suspend their dividends.
However, market conditions rebounded sharply during the third quarter as stores reopened their doors to eager consumers who went on shopping sprees after being stuck at home for several weeks. Meanwhile, online retailers -- which were among the biggest beneficiaries of physical store closings earlier this year -- are increasingly expanding their offline footprints to drive more brand awareness and sales. These factors paint a much more optimistic picture of the future of retail than the vision retail REITs cast last quarter.