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WHAT, REITS WORRY?

Despite bankruptcies and record January store closings, portfolios remain solid

Retail REITs have attracted a lot of industry scrutiny in recent months, thanks to a spate of store closures and bankruptcies. But analyses show that the companies have been largely unharmed, a sign that they are running quality retail portfolios.

Twenty-five different retailers announced a total of 1,469 store closings in January — nearly double the 775 closings for the period in 2001, according to combined research by ICSC and investment bank Salomon Smith Barney. Initially, analysts found the year-over-year increase in store closures troubling.

“It’s going to take time to re-lease those stores,” said Ross Nussbaum, a REIT analyst at Salomon. A closer look at the numbers reveals that of the closings announced in January, 69 percent were neighborhood, community and power center tenants. It makes for an intriguing twist, because such properties, especially grocery-anchored centers, enjoy a reputation as safe harbors in poor economic times. But the retail shutterings are a minor wrinkle, say analysts, who don’t see the properties’ standings diminished at all. Of the store closings in those properties, 55 percent were due to the bankruptcies of Kmart Corp. and Service Merchandise Co., according to the Salomon report.

“Just because you are a discount tenant, it doesn’t mean you are a necessity tenant,” Nussbaum said. “What this does is strengthen our view that grocery- and drug-anchored centers are insulated, given their necessity nature.”

Malls have emerged with barely a scrape. Only 13 department stores and 436 inline stores closed in January — very manageable numbers, in Salomon’s view.

In a survey of potential problem tenants in retail REIT portfolios, New York City-based investment bank Morgan Stanley Dean Witter found that the level of troubled retailers in shopping center portfolios declined between the second and third quarters of 2001, the most recent numbers available at press time. Specifically, only 1.8 percent of mall tenants and 1.9 percent of other shopping center tenants were classified as risky credits during the third quarter.

“It says something about the quality of the portfolio of companies that are held in the public market,” said Matthew Ostrower, a retail REIT analyst for Morgan Stanley. “Real institutional REITs have done quite well in this case.”

Among mall tenants, vision wear, jewelry and toy merchants accounted for most of the risky credits. Names include Cleveland-based Cole National Corp. and Chicago-based Whitehall Jewellers. For other centers, drugstores and video rental chains could be problematic. Merchants there include Wilsonville, Ore.-based Hollywood Entertainment Corp. and Camp Hill, Pa.-based Rite Aid Corp.

EARNINGS BY PROPERTY TYPE 1. Revenue and expense data for strip centers are median dollars per square foot of total occupancy area of the center. 2. Revenue and expense data for malls are median dollars per square foot of nonanchor, center-owned occupancy. Source: ICSC Score 2002, data as of Dec. 31, 2000.

NCREIF PROPERTY INDEX: TOTAL RETURN 4Q 2001   The National Council of Real Estate Investment Fiduciaries Property index tracks capital appreciation and net operating income returns for retail properties nationwide. Both numbers are combined for a total return. For the fourth quarter of 2001, preliminary total returns on malls are 0.44 percent, down from the previous quarter’s adjusted 0.56 percent; initial returns for power centers (including freestanding stores) are 0.74 percent, down from an adjusted 1.60 percent; and preliminary returns on strip and neighborhood centers are at 2.26 percent, down from an unchanged 1.99 percent. Source: National Council of Real Estate Investment Fiduciaries

 

MARKET SCANNER Retail sales’ share of consumer spending slipped from 50.4 percent in 2000 to 49 percent in 2001, the lowest value since 1992, according to the U.S. Census Bureau and the Bureau of Economic Analysis. Over the same period, the retail sector’s share of disposable income also declined, from 48.2 percent to 46.7 percent. Despite the decrease, the 2001 share of income was well above levels in the early 1980s and 1990s. • Though the U.S. job market slumped in January — nonfarm payrolls eliminated jobs for the sixth consecutive month, by 89,000 — the retail trade was the only sector that added jobs, said the U.S. Bureau of Labor Statistics. In January the industry added 62,000 jobs. • While the real estate industry hustles to align a terror insurance backstop, World Trade Center Properties, an affiliate of Silverstein Properties, in February reached a settlement with two insurance companies for damages sustained by the World Trade Center towers in the Sept. 11 terrorist attacks. ACE Bermuda Insurance and XL Insurance, both of Bermuda, are expected to pay the $365 million settlement by the end of March, according to Inman News Features. • Kmart’s bankruptcy filing is now affecting the bond markets. Fitch Ratings has placed the lower-rated portions of several commercial-mortgage-backed securities deals on negative watch, because their credit might not be able to withstand the impacts from the bankruptcy, according to MortgageDaily.com. The following deals were affected: Credit Suisse First Boston Mortgage Securities Corp., 1998-C1 and C2; DLJ Commercial Mortgage Corp., 2000-CKP1; GS Mortgage Securities Corp., 1998-C1; Merrill Lynch Mortgage Investors, 1995-C2; Mortgage Capital Funding, 1998-MC2; PNC Commercial Mortgage Acceptance Corp., 2000-C1; and Salomon Brothers Mortgage Securities VII, 2000-C2.

 

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