TJMaxx store Joe Raedle/Getty Images

Shopping Center REITs Build Value through Redevelopments

Many of the companies relied on redevelopment to repurpose anchor pads vacated by troubled retailers, and improved portfolios by reshuffling properties.

Shopping center REIT DDR is facing the shifting retail business head on, after importing Equity One’s top executive layer in March. Kimco Realty Corp. registered its highest leasing volume in more than 10 years, and expects retailers to continue restructuring their debt and rebalance online and physical sales channels. The industry’s leading shopping center REITs had very different stories for the first quarter of 2017. Overall, many of the companies relied on redevelopment to repurpose anchor pads vacated by troubled retailers, and improved portfolios by reshuffling properties.

Kimco Realty: Maintaining a positive story on leasing

After filling five big-box store vacancies following the Sports Authority bankruptcy and liquidation, Kimco executives acknowledged that the event had a negative short-term impact on the company’s same-store NOI, which grew by 2.25 percent during the quarter.

At the same time, the company is seeing robust demand for the remaining properties, Kimco executives told analysts, and should achieve same-store NOI growth of 2.0 to 3.0 percent for all of 2017.

“Our leasing volume is the highest in 10-plus years,” said Connor Flyn, CEO of Kimco Realty on April 27. “Despite the normal seasonal vacancies usually experienced in the post-holiday season, our gross occupancy remained flat quarter-over-quarter. More importantly, leasing spreads remained strong, fueled by the significant mark-to-market opportunities embedded in our portfolio.”

Kimco expects some of that demand and subsequent leasing activity to come from retailers including TJX, Ross and Burlington, all of which have announced expansion plans for 2017. Those companies also constitute more of Kimco’s tenant relationships than retailers that are struggling.

For now, the company has achieved a net income of $65.2 million, or $0.15 per diluted share, down from $129.2 million, or $0.31 per diluted share, during the same period last year. Its FFO, was $155.1 million, or $0.37 per diluted share in the first quarter of 2017, down from $158.2 million, or $0.38 per diluted share in the first quarter of 2016.

Regency Centers: Two heads are better than one

Mergers sometimes have mixed long-term results, but Regency Centers appears to be on its way to becoming a stronger REIT than it was before its merger with Equity One was finalized in March.

The Jacksonville, Fla.-based REIT broke ground on two projects representing a total investment of $61 million, and more are on the way. At the end of the quarter, 30 projects representing $515 million in investments were in the process of development or redevelopment. On a combined basis they were 46 percent funded and 84 percent leased, according to the company’s first quarter 2017 results statement.

At this point, the amount of Regency’s ground-up and redevelopment projects is split equally in half. During Regency Center’s earnings call on May 10, company officials noted that this breakdown could continue for about three to five years. Looking at the long-term horizon, however, redevelopment opportunities might pick up if new development opportunities slow down.

When it comes to overall tenant health, Regency’s properties were still impacted by retailer bankruptcies that occurred in 2016, said Lisa Palmer, company president and CFO. Its performance guidance for 2017 incorporates about 25 to 50 basis points of total impact from tenant bankruptcies, Palmer said.  


Same-property NOI grew by 3.7 percent in the first quarter, and FFO was $34.2 million, or $0.27 per diluted share. That was probably due to the merger: excluding one-time charges associated with the event, Regency’s FFO was $103.9 million in the first quarter, or $0.82 per diluted share. That represented an increase from $84.4 million, or $0.86 per diluted share, from the same period in 2016.

With a strong start to the year, Regency Centers also issued new guidance. For all of 2017, Regency Centers now expects same-property NOI growth to range between 3.2 percent and 4.0 percent, up from 3.0 percent to 3.8 percent. FFO per diluted share might now range between $3.00 and $3.10, adjusted from $3.33 to $3.39.

DDR: Optimism amid challenges

Regency Centers was able to manage retailer bankruptcies while maintaining mostly positive outlook and guidance in relation to the same period last year. But DDR Corp. has struggled a bit more after tenant departures.

The two companies have more than just shopping center portfolios in common now—three top executives joined DDR in March coming directly from Equity One after the latter merged with Regency Centers.

David Lukes, DDR’s CEO, led a team including Michael Makinen, now DDR’s executive vice president and COO; and Matthew Ostrower, now executive vice president and CFO and treasurer. During the investor call, Lukes addressed concerns about the current market head on.

“We're here mainly because we believe DDR can exploit what is quickly becoming the most dynamic retail environment in decades,” Lukes said. “The challenges we face are at once undeniable and sobering. Many in our core tenant base and, of course investors, fear that retail real estate will simply become obsolete.”

The Beachwood, Ohio-based REIT reported that its same-store NOI for the quarter was down 10 basis points, including a 3.3 percent decline in Puerto Rico. Excluding results from Puerto Rico, same-store NOI was up 0.5 percent. Portfolio leasing rate fell to 94.3 percent from 95.0 percent last quarter.

DDR’s results for the first quarter were weighed down by bankruptcies of Sports Authority, hhgregg and Golfsmith, said Michael Makinen. About 38 percent of the spaces have been released to replacement tenants, and DDR expects the new stores to begin operating in the fourth quarter.

DDR executives also expect to attain a 5 percent to 10 percent leasing spread on the Sports Authority vacancies, with similar results for the other retailers, Lukes said.

Yet the rest of the year will present opportunities for the company, company officials notes. DDR has opportunities to potentially redevelop some of the dark big-box spaces into small shops that complement successful anchors.

Makinen noted that the leasing team executed 285 leases and renewals totaling 1.1 million sq. ft. in the first quarter, about 250,000 sq. ft. of which was previously vacant. Its blended leasing spread was 5.6 percent. Company officials also reported that the leasing spread was negatively impacted by a single anchor deal in Puerto Rico on a dark space that was still paying rent. The company expects to backfill the space. Without the Puerto Rico lease, new leasing spreads were 16 percent.

DDR could also sell off certain assets to reduce its leverage, which is higher than some of its competitors’. During the quarter, DDR sold 10 assets and two land parcels for $123.7 million.

Still, the company issued sobering guidance numbers for the rest of 2017: it expects its same-store NOI to decline by 1.0 percent for the U.S. portfolio, and 1.5 percent for the total portfolio.

Federal Realty: Maintaining a strong position for shareholders     

The state of the retail business is on everyone’s minds, and Federal Realty was no exception. The Rockville, Md.-based REIT highlighted one particularly innovative use of excess space that aligned with the needs of today’s consumers.

During the quarter Federal Realty partnered with Boston-based Freight Farms to monetize some of the REIT’s unused parking spaces. Freight Farms retrofits surplus shipping containers with vertical farming technology capable of growing produce in a fraction of the amount of space required of traditional farms.

The repurposing partnership with Freight Farms aligns with Federal Realty’s focus on redevelopment as an integral part of the company’s business. The company ended the quarter with 94.6 percent of its properties leased, though occupancy averaged 93.1 percent. Some of Federal Realty’s properties are yet to collect rents, which should give a boost to revenues later in 2017 and in 2018.

With redevelopment included, Federal Realty’s same-store NOI rose 4.3 percent during the quarter.

When it came to repurposing retail spaces vacated by troubled retailers, the company was left with 730,000 sq. ft. of anchor space, and had leased more than 50 percent of the pool.

Federal Realty increased its 2017 FFO guidance to $5.85 to $5.93 per share. It expects earnings per diluted share to reach $3.35 to $3.43.

Brixmor: Banking on redevelopment of key locations

Brixmor, a New York City-based REIT, counts on the locations of its properties to achieve strong performance results, and the strategy paid off in the first quarter of 2017.

After repositioning anchor spaces and making key changes to its portfolio through acquisitions and sales, Brixmor achieved NOI growth of 3.2 percent, rent spreads of 16.4 percent and growth in FFO per diluted share of 4.4 percent, according to a company statement.

It did all of this despite an environment troubled by increased retail bankruptcies and store closings.

“Our leasing and redevelopment activity continues to demonstrate the upside embedded in our portfolio given our locations, below market rent basis and accretive redevelopment potential,” said James Taylor, CEO and president of Brixmor.

On the redevelopment front, Brixmor added 11 redevelopment projects to its pipeline, which the company expects to cost $142.1 million on an aggregate basis. The company expects an average incremental yield of 9.0 percent.

Brixmor completed four anchor space repositioning projects and added another five to projects in the pipeline. As of March 31, the company had 17 projects in the anchor  repositioning pipeline, costing a total of about $33.1 million, with expected average incremental NOI yields of 13.0 to 15.0 percent.

Looking ahead, Brixmor issued guidance that expects FFO to reach a range of $2.05 to $2.12 per dilute share in 2017, and same-property NOI growth to reach 2.0 percent to 3.0 percent.

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