The retail sector is experiencing major changes. Record-high vacancy rates, unprecedented business closures, and lack of demand as consumers shift to online shopping are forcing retailers to adapt, including big-name retail real estate investment trusts (REITs) like Retail Properties of America (NYSE: RPAI).
While often overlooked by other major retail REITs, Retail Properties of America may provide more upside and growth potential as it merges with Kite Realty Group Trust (NYSE: KRG) by the end of this year. If you're considering purchasing shares in this company, here's what you need to know.
Retail Properties of America company profile
Retail Properties of America specializes in the acquisition, development, and management of outdoor retail centers in high-density, high-demand suburban markets across the nation. As of the first quarter of 2021, the company had interest or ownership in 102 shopping centers totaling 19.9 million square feet of rentable retail space in many of the top 20 metropolitan statistical areas (MSAs), although its primary focus is in 10 core markets:
Of the company's portfolio, 48% are grocery store-anchored neighborhood community centers, followed by mixed-use centers (33% of portfolio) and power centers (19% of portfolio). Grocery-anchored retail centers, including major retailers like Target, Trader Joe's, and Whole Foods, make up 67% of the company's ABR.
Retail Properties of America leases its retail space to a wide range of tenants, including essential businesses (36% of ABR), nonessential retailers (45%), office space (7%), and restaurants (16%). National brands make up 73.5% of ABR, regional brands make up 0.1%, and local retailers make up 26.4% of ABR.
The company strategically owns assets in suburban markets in higher-earning neighborhoods where the median income within 3 miles of all facilities is $92,000.
Retail Properties of America news
The COVID-19 pandemic has, without a doubt, hurt the company's performance over the past year and a half. Lease income in 2020 was down $51.6 million compared to 2019, while funds from operations (FFO) and net income were down 17% and 53%, respectively.
Pandemic-related closures put tremendous pressure on retailers, resulting in partial payments -- and sometimes no payments -- to landlords like Retail Properties of America. While the exact percentage of the company's portfolio in deferral hasn't been disclosed, 93% of those in deferral paid in Q1 2021.
Vacancies also skyrocketed during this time, pushing rental rates down and stalling leasing momentum. This combination of factors is what continues to impact the company's performance negatively.
However, things are starting to improve. Billed rental collections are increasing each quarter, with 96% of billed rents collected as of April 26, 2021, while occupancy is at 91.5%. It's no surprise essential retailers are leading the way with 100% of rents collected from essential tenants.
Entertainment centers (including play centers and movie theatres), health centers, full-service restaurants, and other nonessential retail businesses have the lowest numbers when it comes to rental receipts and collections, which continues to put financial strain on the company.
Conserving capital has been key for the company over the last year as market uncertainty and widespread retail closures weighed heavily on them. Thankfully, the company's debt ratios are favorable, particularly when compared to some of its biggest competitors in the space.
Retail Properties of America's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) was 6.8x, high by most standard REITs but third-lowest among retail REITs. As of Q1 2021, the company had $888 million in cash and cash equivalents and no major debt maturities coming due until 2023.
At the start of 2021, Retail Properties of America announced a merger with Kite Realty Trust Group, which will create one of the largest retail REITs in the space, valued at $7.5 billion. Mergers to this degree don't happen every day and will have big impacts on shareholders and future growth.
The merger -- expected to be complete in Q4 2021 -- will trade under Kite Realty Trust Group's ticker KRG, with each of RPAI's shares being converted into 0.6230 KRG shares.
Since KRG share prices currently trade above RPAI, most investors will benefit from the merger not just in share value but also in dividend payouts and a much larger and more diversified portfolio (estimated 185 properties). KRG will become the primary management team, adding four of RPAI's existing board members to KRG's board of trustees.
The company has four active redevelopment and expansion projects underway in the Washington, D.C., and Baltimore metros, as well as in Dallas. The projects will add 211,000 square feet to its gross leasable area (GLA) and include retail space, offices, and 408 multifamily units.
Nearly half of the company's ABR (49%) comes from its Sun Belt markets in Texas, Georgia, and Arizona. Of KRG's ABR, 40% is derived from the Sun Belt and will provide new and additional exposure to markets in Florida, North Carolina, South Carolina, Nevada, and Texas, making the Sun Belt market a potential long-term growth opportunity for the company.
Retail Properties of America stock price
Like many other retail REITs, RPAI's share prices plummeted at the onset of the pandemic, although it has mostly recovered to pre-pandemic levels. Because of this, annualized returns have been dismal, with a -2.34% return for shareholders over the past five years and a nearly 7% decrease in share price over that same period.