Impact Blog
The COVID-19 opportunity for retail REITs: Invest in tenants

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      By Brendan McCarthyESG Research Analyst, Calvert Research and Management

      Washington -- As COVID-19 caused shutdowns and other restrictions across the nation, retailers and the landlords that rent to them have been hit particularly hard. Each of the 10 largest retail real estate investment trusts (REITs) in the US has significant portfolio exposure to areas hard hit by the virus. In response, the local jurisdictions have mandated closing the shopping centers and recommended that consumers stay in their homes, bringing retail center traffic to a screeching halt, almost overnight.

      But these shutdowns just accelerated what was a long-term trend - e-commerce eating away at the traditional in-person shopping experience. As owners of shopping malls, strip malls and other retail locations, retail REITs have been slowly losing ground to online shopping for years, with no indication that the trend will abate or reverse. By the end of 2019, e-commerce accounted for almost 13% of all US retail sales.

      Calvert blog 6-4-20

      In response, these REITs have begun shifting their business model away from destination shopping and toward a community-gathering model, with restaurants, gyms and offices alongside the traditional shops. But traditional shops will remain the core of these centers. As COVID-19 threatens that core, REITs should act now to protect these traditional retailers. These tenants provide income for the REIT and have a network effect on its assets - more tenants and greater occupancy draws in more shoppers. Conversely, growing vacancies not only deter shoppers, but also have a spiraling effect on other tenants, especially as co-tenancy lease clauses allow some tenants to cancel or amend their leases if major anchor stores close.

      In normal times, shopping centers are open to shoppers and tenants that vacate can be replaced, though it takes time and expense. In the current environment, shoppers cannot or will not even access many retail centers and it is next to impossible to fill any vacancies, making maintaining occupancy a top priority for REITs.

      The 10 largest US retail REITs by market cap have, collectively, over $8 billion of cash on hand and another $11 billion of undrawn credit available. Yet, only two-thirds of their rent was able to be collected in April. The REITs, therefore, have an opportunity to help their key stakeholders, their tenants, through rent deferrals and other assistance. In exchange, they can ask for lease extensions, a percent of sales and/or access to a tenant's financial statements. For a tenant in distress, these would be a small price to pay for a financial lifeline. For the REITs, they can deploy low-yielding capital into investments that secure longer occupancy and future cash flow, which could generate a higher return on that capital.

      Bottom line: Retail REITs have been impacted by the pandemic, but the substantial capital cushion that the 10 largest retail REITs possess gives them the unique opportunity to help struggling tenants remain solvent and remain long term customers, positioning both for future success.