Strip Middle REITs’ Lease Collections Close to 90%

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Strip Center REITs' Rent Collections Near 90%

Strip center REITs are starting to see an improvement in rental collections. BTIG's recent research shows that the pandemic's rental collections have improved over the past six months, standing at nearly 90%.

This is a significant increase from the 49% low seen in April and May, representing a 3,100 basis point increase in collections. Weingarten, ROIC and Kite reported 87.7% rental income.

BTIG assumes that rental income will continue to improve by the end of the year.

Just as in the 2008 financial crisis, small shop tenants were hit hardest by the pandemic, while anchor tenants with large balance sheets weathered the pandemic well. However, the landlords have pledged to help small tenants through the pandemic crisis, even if there is no further financial support or relief from Congress. Many REIT landlords in this area have implemented tenant assistance programs to help keep small businesses in strip centers.

While helping small tenants has been a priority, key retailers are creating stability and driving rental income. As a result of the pandemic, grocers and other major retailers like pharmacies have paid almost 100% of the rental payments and many retailers are looking to expand as a result. Top of the list for new locations: omnichannel-friendly locations that support delivery services and locations close to the consumer. During the pandemic, e-food sales have increased 30.7% and grocers are looking for locations to take advantage of this demand.

Grocers aren't the only retail category that has been able to maintain healthy rent payments through the pandemic or is planning to expand due to increased demand. DIY stores, for example, generated an average of 97% of rental income from the pandemic. This puts them at the top of the list of retail center operators getting new leases. To name one case, Regency replaced a Kmart room in Florida with a hardware store brand. Other REITs are including home improvement retailers in their future leasing strategies.

On the flip side, there are a handful of retailers who have defaulted on rental payments due to the pandemic. National-level restaurants have struggled to pay rent, but indoor dining areas have outperformed restricted dining markets. In New York City, where there is a 25% limit on indoor dining, 87% of bars and restaurants failed to pay full rent in August. As a result, 100,000 restaurants and 1,500 chain restaurants across the country have permanently closed. The fitness centers had similar problems, largely because they didn't reopen until May. This has split the market as some tenants like 24 Hour Fitness and NY Sports Club file for bankruptcy and others like Planet Fitness continue to expand their real estate base.

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