A trend that has been building over the past decade reached a tipping point during the global pandemic, which accelerated online shopping trends and boosted e-commerce and online retail sales. And now, it seems, the retail apocalypse is in full swing.It's no wonder investors may have concerns about whether Regency Centers (NASDAQ: REG) -- one of the largest retail real estate investment trusts (REITs) owning outdoor retail centers in high-density, suburban markets across the country -- is in trouble. Let's take a look at the company today to see what its future may hold and how the company is faring.
A brief look at Regency Centers today
As of the first quarter of 2021, Regency Centers owns 406 open-air retail centers comprising 55 million square feet of retail space in most of the country's major metro markets. The company's portfolio is 80% grocery-anchored, and 46% of its average base rent (ABR) is earned from essential retailers. This is an important marker among retail REITs because essential operators were allowed to stay open during the pandemic, driving visitors to the centers during retail closures.
Like most other retail operators, the pandemic has had a significant impact on portfolio performance. Thankfully, however, only 1% of its portfolio was placed on a deferral plan, amounting to $42.7 million. And as of the first quarter of 2021, 93% of its base rent had been collected.
Why Regency Centers isn't in trouble
Regency Centers has a few strengths when it comes to navigating the retail apocalypse and challenging economic conditions. For instance, the retail REIT owns open-air retail centers, which are considered safer ways to shop than indoor malls or retail centers. The company also owns Class A centers in top-tier markets, which are surrounded by affluent shoppers.
High-income earners have been less affected financially by the pandemic -- meaning that, despite shutdowns, spending hasn't halted. Decreased foot traffic, combined with a large percentage of nonessential retailers being closed for extended periods, definitely impacted the company's revenues in 2020, but that seems to be in recovery. Foot traffic in the centers has climbed back up to 94% of what it was in 2019.
Although still considered slightly high by REIT standards, the company has a relatively low debt-to-EBITDA ratio of 5.9 times compared to other retail operators. Coupled with the $1.2 billion in cash and cash equivalents, the company shouldn't have issues repaying debt obligations and maintaining -- or even raising -- dividends in the near future, assuming rents continue to recover. In addition, the company has adjusted its 2021 guidance after a stronger-than-anticipated Q1, an ode to the company's confidence in market recovery this year.
Why Regency Centers is in trouble
Many of the company's holdings are in high-density markets, including New York; Washington D.C.; Seattle; San Francisco; Los Angeles; Miami; and Chicago. Some of these markets are booming, while others are seeing residents flee the city. Long-term trends mean residents are likely to return once full recovery is achieved, but they also imply affected markets may see higher vacancy levels and flat or declining rental rates over the next few years.
Thankfully, the company positioned its properties in suburbs of these markets, where neighborhoods have seen an uptick in demand over the past year as people have moved outside the urban core.
Of Regency Centers' top 10 tenants (based on ABR), including grocery chains like Kroger, Publix, Safeway, and Whole Foods, none are a major concern for closing anytime soon. But the future of retail is still somewhat uncertain. As more and more retailers file for bankruptcy or shut down stores in an attempt to stay afloat and adapt to more online shopping, smaller tenants may push vacancy rates higher.And the risk of big retailers minimizing the number of stores versus storing products in warehouses is likely where we're headed. The company already has the second-highest base rent per square foot of all retail REITs; given today's tight retail market, this means there isn't a ton of room to grow outside of new developments.
The Millionacres bottom line
It seems Regency Centers is rebounding quickly and adapting to the changes in the marketplace, but operating in a dwindling sector is a tough play. Retail isn't dead, but it is changing, and the way people shop in the future could, and likely will, look very different from today.
How that plays out for a huge retail REIT operator that owns over 400 centers nationwide is unknown, but it doesn't appear the company is in major trouble for the time being. Considering the company's dividend provides a 3.5% return, it could be a worthwhile buy for the right investor.