Retailers are under pressure due to the steady shift from in-person to online sales -- a shift that's forcing them to rethink their strategies for improving profitability, including shrinking their store counts. This headwind has had a notable impact on real estate investors focused on owning retail properties.
One of those retail-focused investors is real estate investment trust (REIT) RPT Realty (NYSE: RPT). Here's a closer look at the company and its plans to adapt to the changing retail environment.
RPT Realty company profile
RPT Realty is a retail REIT focused on owning open-air shopping centers in suburban areas. As of the end of 2021's first quarter, the REIT held interests in 49 multi-tenant properties, owning 44 of those properties outright. Five others are part of a joint venture -- focused on grocery-anchored shopping centers in fast-growing metro areas -- formed in late 2019 with Singapore's sovereign wealth fund (GIC). In early 2021, the REIT created a third platform, this one focused on single-tenant net lease retail properties.
The REIT's 10 largest markets (and their contributions to RPT Realty's annualized base rent [ABR]) include:
- Detroit: Nine properties with 2.3 million square feet contribute 19.2%.
- Cincinnati: Three properties with nearly 1.2 million square feet supply 11.1%.
- Miami: Six properties with more than 1 million square feet provide 7.2%.
- Jacksonville: Two properties with about 750,000 square feet deliver 7.1%.
- Minneapolis: Two properties with roughly 445,000 square feet contribute 6.4%.
- St. Louis: Four properties with more than 825,000 square feet supply 6.3%.
- Chicago: Four properties with over 750,000 square feet provide 5.9%.
- Tampa: Four properties with nearly 750,000 square feet deliver 5.8%.
- Denver: One property with almost 500,000 square feet contributes 5.5%.
- Nashville: One property with more than 630,000 square feet supplies 5%.
While each of those cities is one of the 40 largest metro areas in the country, a significant portion of RPT's ABR comes from the slower-growing Midwest. However, the company formed its joint venture with GIC to invest in attractive high-growth markets like Austin, Texas; Nashville, Tennessee; Charlotte and Raleigh, North Carolina; Miami, Tampa, and Orlando, Florida; Richmond, Virginia; Minneapolis; Phoenix; and Boston.
RPT Realty leases space to various tenants across many merchandise categories, led by the following 10 (based on percentage of ABR):
- Discount apparel: 10%
- Home and furniture: 10%
- Apparel: 7%
- Fitness: 7%
- Grocery: 6%
- Service: 6%
- Fast-casual and quick-service restaurants: 6%
- Full-service restaurants: 5%
- Theaters: 4%
- Hobbies: 4%
It's worth noting that the REIT gets a significant portion of its rent from retail categories at risk of disruption from e-commerce or an economic recession. Further, a large portion of its top 25 tenants -- which contribute 40.8% of its ABR -- are either non-investment grade or private companies, meaning they have less financial flexibility when market conditions deteriorate.
However, 66% of its ABR comes from shopping centers anchored by grocery stores or a grocery component. Fortunately, those stores drive a steady stream of customers into shopping centers, which benefits other tenants.
Further, RPT Realty aims to enhance its portfolio via its investment ventures. For example, the GIC joint venture will target grocery-anchored shopping centers in fast-growing markets. Meanwhile, the net lease platform plans to focus on essential retailers with high credit quality.
RPT Realty news
RPT Realty's high exposure to financially challenged retailers in categories susceptible to disruption from e-commerce and economic downturns impacted the company in 2020. For example, many of its tenants couldn't pay their rent because of the pandemic's effect on their operations. As such, RPT initially only collected 65% of the rent it billed during the second quarter of 2020, though that number improved to 81% by early 2021.
Meanwhile, its rental collection rates were 89% and 91% in the third and fourth quarters, respectively. The decreased collection rates weighed on funds from operations (FFO), which declined from $90.9 million (or $1.04 per share) in 2019 to $64.2 million (or $0.78 per share) in 2020.
The REIT took several actions in 2020 to preserve its financial flexibility. For one, it suspended its dividend, capital spending, and acquisition activity in late March. It also sold some non-core land parcels in Q4 for $1.4 million. Those moves positioned the REIT to end the year with an investment-grade credit rating, improving its financial flexibility.
The lingering effect of the pandemic had some impact on RPT Realty's results in early 2021. Overall, its same-property net operating income (NOI) declined by 8.5%, causing FFO to drop from $0.26 per share in Q1 2020 to $0.19 per share in 2021. However, with its rental collection rate continuing to improve, the REIT had the confidence to reinstate a quarterly dividend.
One of 2021's earlier highlights surrounded the forming of a new investment platform with three other institutional investors. The venture will invest in single-tenant, net lease retail properties, and RPT Realty seeded it with 42 properties subdivided from its existing shopping centers. The initial portfolio has a $151 million value, accounting for 6% of the company's ABR.
Meanwhile, the new platform has the financial capacity to invest up to $1.3 billion on net lease properties, giving the company a potential source of future growth.
RPT Realty also agreed to acquire a grocery-anchored shopping center in the Boston area in early 2021 for $104 million. In addition, it intends to sell some of the net lease components to its new platform later in the year, leveraging that partnership to create additional shareholder value.
RPT Realty stock price
RPT Realty has struggled to create value for shareholders in recent years: