REITs Win As Weak Retailers Go Bankrupt

Core Viewpoint - The retail landscape is shifting as consumer preferences evolve, leading to the closure of certain retailers while others are positioned to capitalize on the changing market dynamics [1] Group 1: Retailer Bankruptcies and REITs - Many shopping center REITs are exposed to bankrupt retailers, resulting in stock declines following bankruptcy announcements due to interrupted rental revenues [2][10] - The impact of tenant bankruptcies on REITs is complex, with potential for both losses and growth opportunities depending on market conditions [3] - Retail rent per square foot has increased by approximately 30%-50% since many leases were signed, enhancing the value of lease obligations [11] Group 2: Lease Obligations - Long-term leases are both liabilities and assets for retailers, impacting their balance sheets during bankruptcy [4][5] - Retailers may choose to continue paying rent during bankruptcy if the location is profitable, despite corporate-level issues [7] - If a retailer stops paying rent, they still owe the remaining rent for the lease term, which can pose risks for REITs if the tenant's asset value is insufficient for recovery [9][10] Group 3: Market Dynamics and Opportunities - The demand for retail space is high, with low vacancy rates, leading retailers to buy lease obligations from bankrupt entities at auctions [14] - Shopping center REITs are experiencing strong leasing activity, with some reporting rent growth exceeding 50% on recaptured spaces [15][16] - The overall leasing environment is favorable, with occupancy rates increasing and blended leases being signed at rates approximately 20%-50% above expiring leases [21] Group 4: Long-term Outlook for Shopping Centers - The retail sector has seen a significant improvement in fundamentals, with high demand and minimal new supply since the Financial Crisis of 2008 [22] - Shopping centers are now viewed as an organic growth asset class, justifying a higher valuation multiple, currently averaging 17X AFFO [23] - The sector is expected to re-rate to an average of 19X AFFO due to a stronger growth outlook [24]