The retail industry is facing two notable headwinds. E-commerce is accelerating, shifting sales away from physical stores, leading many retailers to shrink their footprints. On top of that, economic recessions can significantly impact certain retailers, with significant downturns -- like the one experienced in 2020 due to the COVID-19 pandemic -- often causing a rash of bankruptcies across the sector.
These issues are causing real estate companies focused on retail to shift their strategies. Here's a closer look at how real estate investment trust (REIT) Weingarten Realty Investors (NYSE: WRI) is repositioning itself for the future of retail real estate.
Weingarten Realty Investors profile
Weingarten Realty is a retail REIT focused primarily on owning, managing, and developing open-air shopping centers. As of the end of March 2021, the REIT operated 156 properties consisting of 29.8 million square feet of gross leasable space across 15 states. The company focuses on owning shopping centers containing grocery stores, as 82% of its annual base rent (ABR) comes from properties featuring a grocery store.
The REIT's top five markets by ABR are:
- Houston: 18%
- Miami/South Florida: 11%
- Orlando/North Florida: 11%
- San Francisco/Northern California: 9%
- Phoenix: 9%
Weingarten Realty focuses on urban locations in markets that should continue growing due to an expanding employment base, pro-business environment/low state taxes, highly educated population, and in-migration within the country or immigration to the country.
One region fitting most of these criteria is the Sun Belt that stretches across the southern portion of the country. Overall, 81% of the company's ABR comes from the Sun Belt region. Meanwhile, 90% of its net operating income (NOI) comes from its target markets that also includes large cities along the West Coast.
While the REIT operates 156 properties across several major markets, its top 12 shopping centers comprise 25% of its portfolio's value. These properties are in the best locations of its top markets, making them highly desirable spots for tenants to set up shop because they're close to many consumers with high incomes.
Weingarten leases space to a diversified tenant base. Overall, its top 10 tenants account for 17.9% of its ABR. That's the third-lowest tenant concentration among shopping center REITs.
Meanwhile, the bulk of its tenants are largely resistant to disruption from e-commerce, with 84% of its ABR coming from tenants with low internet vulnerability, like supermarkets, restaurants, medical, banks, health clubs, services, and discount apparel. Meanwhile, only 3% of its ABR comes from sectors with high internet vulnerability, like books, office supplies, and electronics.
Weingarten Realty Investors news
On April 15, 2021, Weingarten Realty agreed to a strategic merger combination with fellow shopping center operator Kimco Realty (NYSE: KIM). The transaction will create the largest shopping center-focused REIT by market capitalization while enhancing the combined company's earnings metrics and deleveraging its balance sheet. It will also reduce its cost of capital and operating costs. Kimco would manage a national portfolio with 559 open-air, grocery-anchored shopping centers and mixed-use assets with roughly 100 million square feet of gross leasable area.
Kimco will exchange 1.408 of its shares and $2.89 per share of cash for each existing Weingarten share. Following the close of the transaction, which the companies expect will happen during the second half of 2021, Weingarten shareholders will own 29% of the combined company.
The merger agreement followed a challenging year for Weingarten in 2020. The pandemic hit the retail sector hard, as nonessential retailers had to close during the early part of the year to help slow the spread, which impacted their ability to pay rent. Meanwhile, the virus kept foot traffic at shopping centers down as many consumers shifted their purchases online.
As a result, Weingarten only initially collected 77% of the rent it billed during the second quarter. While that improved to 93% during the third quarter and 94% in the fourth quarter, it deferred and abated rent for many struggling tenants. This means its core FFO per share declined from $2.10 in 2019 to $1.65 in 2020.
Despite the pandemic-related headwinds, Weingarten made significant progress on its growth strategy in 2020. The REIT purchased two shopping centers and four buildings in existing centers for $167 million, including the remaining 42% of the Village Plaza at Bunker Hill it didn't already own, one of its top-12 properties. It also invested $75 million into its three large new mixed-use development projects focused on adding multifamily units and new retail components to existing shopping centers. Weingarten funded those investments by selling 11 shopping centers and four land parcels for a total of $248 million.
Weingarten Realty Investors stock price
The headwinds facing the retail sector have impacted Weingarten's ability to create value for its shareholders in recent years: