REIT Predicts U-Shaped Retail Recovery

One of the largest real estate investment trusts in the U.S. reported earnings this week with the expected decrease in revenue, but an optimistic look at reopening. Retail Properties of America (RPAI), which owns and operates 102 multi-retail sites, showed a net income drop from $44.4 million to $15 million this year. A $25.7 million decrease in lease income was driven by the impact of the pandemic on store closures.

However, the company’s total portfolio square footage was 92 percent open as of July 31. As of the end of July RPAI had collected 71.4 percent of July rent, ahead of the collection pace for June, and reported an aggregate of 68.4 percent of second quarter rent.

On its earnings call, the company cited positive momentum and urged a patient approach to its business.

“We believe the long-term outlook continues to favor our strategic footprint and asset mix,” said CEO Steven Grimes. “However, the recovery from the impact of COVID-19 will take on a more U-shape recovery and further be reflected in the coming quarters. In the near term, our operational momentum is building, and we continue to advance lease amendments with tenants, a key step to further normalization of our cash flow profile that also helps us to gain an even deeper understanding of the drivers of our tenants’ businesses. With rent receipts above our approximate 60% break-even level, we hold much optionality for our capital structure.”

Grimes said the broader macroeconomic backdrop remains hard to predict. He said the company is considering the elevated unemployment rate, and balancing that with stabilization in consumer confidence since April. He also cited the relative strength in the housing market as a positive sign of consumer spending. Grimes addressed the company’s restaurant tenant profile as part of the mix.

“I would say we’re seeing a higher-touch but smaller-format restaurants, health and beauty, still digitally native,” he said. “And obviously, soft goods, boutique and, call it, medium-sized format. So that continues to be the large majority of the population. And again, this is typically existing sales are compelling in the corridor, but they want to trade to more of an open-air format for not only the perceived safety, but I think just for the flexibility. We’ve talked about our mixed-use product, wider sidewalks and just a broader ability to pull our restaurants, as an example, inside out. And that has provided, I think, a lot of value and viability, especially for our full-service and sit-down restaurants. And I think you’re seeing the gravitational pull for that reason as well.”

Company executives warned about the effect of potential secondary shutdowns, especially in states where the virus is seeing a resurgence. It was listed as one of the potential obstacles in the company’s financial goals for the year.

“It is possible that public health officials and governmental authorities in the markets in which the Company operates may impose additional restrictions in an effort to slow the spread of COVID-19 or may relax or revoke existing restrictions too quickly, which could, in either case, exacerbate the severity of the adverse impacts on the economy and the Company’s business,” it said in a statement. “The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on the Company’s business.”