Anchors Aweigh for Retail REITs

By Steven Marks, Managing Director and Head of U.S. REITs, Fitch Ratings

After withstanding a difficult year of operating fundamentals in 2009, property fundamentals have begun to trend positively for retail REITs, which now have a stable outlook through 2011.

Same-store net operating income has begun to trend for the better (albeit slightly) and occupancy rates are now stabilizing for retail REITs during first quarter-2010. Capitalization, liquidity, and financial flexibility has also improved, with retail REITs raising well over $2 billion in senior bonds. More robust debt issuance is bolstering the liquidity profiles and leverage of retail REITs.

After declining slightly over 1 percent in 2009, same-store net operating income for retail REITs has increased 1.3 percent through the first quarter of this year. Same store net operating income levels will remain flat to slightly negative in 2010 for the larger mall and freestanding retail REITs. Additionally, strip center REITs in regional markets will trend more negative.

With strengthened financial platforms, retail REITs should be able to withstand a muted economic recovery. It should be noted that though GDP is expected to rise more incrementally this year, the growth will be stymied by high unemployment levels, continued challenges to consumer credit, and United States household deleveraging.

Despite recent pickup in consumer demand and minimal supply side pressures from new development deliveries, rent and net operating income likely will be pressured due to elevated market vacancies through this year. Additionally, while same-store sales for retailers have recently trended positively, store closure risks remain for certain tenants, limiting REITs’ ability to increase rents.