What are Retail REITs?
Retail REITs own, operate, and develop retail properties including primarily community centers and enclosed regional malls with national and regional retailers as tenants. Beyond the two primary retail property types, REITs also invest in outlet centers, lifestyle centers, and street retail. A full list of retail center types and characteristics as defined by ICSC can be found here. Retail REITs, both mall and community center operators, significantly improved their portfolios and balance sheets through the disposition of lower quality properties in the years following the recession. In addition, existing retail portfolios have benefited from little new supply since the recession. Today, developers in the retail space require significant preleasing and are generally well located in established submarkets as opposed to the speculative building prior to the recession. Lease terms typically range between five and 10 years for in-line tenants, while anchor leases can exceed 20 years. Most retail REITs focus on one or two property types and have exposure across the United States.
Regional Malls
Mall REITs own and operate enclosed regional malls, outlet centers, and, in some cases, lifestyle centers, associated centers, and street retail. Enclosed regional malls generally feature several large anchors with enclosed in-line tenancy of full-price regional and national retailers. Regional malls can be further classified as either “A” or “B” quality malls. The regional mall sector is a mature industry as the top mall owners have consolidated the vast majority of “A” malls in the country and ground-up development of new centers is nonexistent. With limited opportunities for acquisitions and development, mall operators drive NOI growth through leasing efforts, operating expense initiatives, redevelopments, and expansions.
The Difference Between “A” Malls and “B” Malls
“A” malls are typically defined as malls with sales productivity in excess of $500/sf while malls with sales productivity between $300/sf and $500/sf are defined as “B” malls and sub- $300/sf malls are defined as “C” malls. Going beyond the sales productivity definition, “A” malls are the dominant retail center in a strong submarket with a desirable and unique tenant mix. “B” malls, on the other hand, could have a subordinate position in a major market or could be a dominant center in a secondary or tertiary market. The gap in performance and investor sentiment between “A” and “B” malls has widened in recent years as “B” malls have been disproportionately impacted by store closures, bankruptcies, and lower traffic. Further, “A” malls have become a key part of retailers’ omnichannel strategies that integrate full-line and off-price bricks and mortar retail channels seamlessly with online customer experiences.
Examples of “A” malls include: Simon Property Group, Taubman Centers, and Macerich
Examples of “B” malls include: CBL Properties
Outlet Centers
Outlet centers are typically open-air centers located within driving distance of major markets with factory outlet retailers as tenants. Outlet centers serve as one of the most established forums for value retail – one of the primary retail channels that includes outlet concepts, offprice retailers, and discount department stores. Unlike regional malls, outlet centers are still being actively developed with ~10 centers being delivered annually across the industry. Development yields have remained adequate due to the low cost of land for potential outlet center sites as well as relatively inexpensive construction costs for an outdoor layout with basic amenities.
Tanger Factory Outlets is a good example of a pure-play outlet center REIT.
Lifestyle Centers
Lifestyle centers are also typically open-air centers located in affluent suburban areas with a pronounced focus on entertainment and dining. Lifestyle centers also frequently feature a mixed-use component of office, apartments, and/or a hotel.
Street Retail
Broadly, street retail consists of street-facing retail properties in dense urban retail corridors. The markets can range from the most prestigious high street retail corridors such as Fifth Avenue in New York to neighborhood urban retail in areas such as Lincoln Park in Chicago.
Community Centers
Community center REITs own, operate, and develop community centers, power centers, and, in some cases, lifestyle centers and street retail. Community centers generate relatively stable cash flow as the need-based and service-based tenant mix is more resilient during tough operating conditions. Beyond organic growth of 3%+, the community center REITs augment cash flow growth with redevelopment, acquisitions, and some ground-up
development.
Grocery-anchored Neighborhood Centers
The majority of REIT owned community centers are grocery-anchored with in-line tenants ranging from staples and services to soft goods. Grocers and other anchors such as home furnishings, sporting goods, and junior department stores are crucial to draw in traffic to the centers where in-line tenants can thrive due to the number of daily visitors. Neighborhood centers are considered to be resilient to adverse economic conditions due to the necessity-based nature of their product offerings.
Power Centers
Power centers, the second most prevalent REIT owned center, consist of big box category killer anchors with few small in-line spaces. Common tenants include home improvement, discount department, electronics, warehouse clubs, and hypermarkets. Although a grocery anchor is not a prerequisite, many power centers boast a grocery anchor or a grocery component within a hypermarket.
Associated Centers
Associated centers are community centers located across from or adjacent to regional malls in the outparcel space. These centers are often owned and developed by regional mall operators to maximize the gross leasable area of the center and to realize leasing synergies between the mall and associated center.
Key Industry Terms
Anchor: The anchor is the big box retailer that drives traffic to the shopping center including
department stores, grocery, electronics, home furnishings, sporting goods, and discount department. Anchors typically have longer leases (10–20+ years) and pay significantly lower rental rates per square foot.
In-line: These are non-anchor tenants with smaller store footprints.
Common Area Maintenance (CAM): These expenses are incurred by the landlord for the maintenance and upkeep of the shopping center such as parking lot expenses and snow removal.
Tenant reimbursements: These reimbursements are CAM expenses for which the tenant is responsible under the lease agreement. The lease agreement could stipulate fixed CAM, prorata CAM, or a hybrid.
Operating expense recovery ratio: This ratio is calculated as tenant reimbursements divided by operating expenses. Increasing the operating expense recovery ratio is a common method to expand a retail REIT’s NOI margin.
Sales productivity (sales/sf): This key metric is total in-line tenant sales divided by occupied square footage.
Occupancy cost: This tenant cost is the total rental cost to the tenant (base rent, percentage rent, and operating expense reimbursements) divided by tenant sales. Retailers are willing to pay higher occupancy costs in order to operate in higher productivity locations.
Densification: Densification is the addition of a mixed-use component of office, apartments, and/or a hotel to an existing retail property.
Remerchandising: Remerchandising is the upgrading of the tenant mix by recapturing space from unproductive tenants and re-leasing the space with a stronger tenant.
Same Store Results: Same store numbers offer investors insight into how the underlying operations at the REIT’s facilities are performing.
Net Asset Value per Share (NAVPS): Retail REITs, both community centers and regional malls, are valued based on their NAVPS largely due to the transparency of pricing of each of the REITs’ property types across the quality spectrum.
