Among a litany of now-familiar pandemic-adjacent phrases, concepts, and behaviors to which we’d seldom, if ever, consciously paid, we have the lagging indicator. In the simplest of terms, the term refers to trend indicators that are observable and apparent well before their impact is reflected in longer-term data. Effectively, it means that today’s data is only informing our understanding of some point in the past.
The most notable contemporary example is the central pillar of our understanding of COVID-19 itself. Between an incubation period that can last up to two weeks, with a median length of about five days, along with the time required for the submission and processing of tests, the most up-to-date data regarding the scope and scale of the virus’ spread doesn’t reflect people’s behaviors today, but rather the impact of what’s taken place, in most cases, more than a week ago.
Wall Street – no stranger to a lagging indicator in the best of times – will be scrambling to find meaning in the first wave of COVID-era, post-lockdown financial results, looking for any glimpses into an extremely uncertain future. This phenomenon applies across the board, as there’s hardly an industry, region, or market segment that’s been left unscathed, but there are some businesses to whom the pandemic has dealt a particularly severe blow.
A little over a month ago, we examined an emerging crisis for the operators of commercial real estate developments, namely those whose revenues are reliant on restaurants and retail. The sneak peek was not encouraging, revealing a scene in which these tenants, most of them compelled to close for an undetermined period, seeking reductions or abatements in their rents, were, in many cases, simply refusing to pay. Compounding the already-formidable issue of “who knows when we’ll be allowed to even be open again” is that, by their very nature, these establishments, particularly restaurants, are seen as high risk, and highly conducive to the virus’ spread. Even after they are allowed to re-open, eateries may have to wait sometime before their business returns to anything resembling “normal”.
And yet, there’s little in the first quarter (Q1) financial result from publicly-traded commercial real estate firms and real estate investment trusts (REITs) to indicate the scale of the catastrophe with which they are contending. Naturally, the closures hit results, but the delays in government’s efforts to curb COVID’s spread pushed them to quarter’s last couple of weeks, thus allowing strong results from January and February to mitigate the impact.
For instance, Macerich, the United States’ third-largest operator of shopping centers, reported adjusted funds from operations (FFO; the equivalent of earnings per share for REITs) of $0.81 per share, which topped analysts’ estimates and was in line with the prior year’s mark. (Note: “adjusted” FFO excludes outstanding/non-recurring items). The company generated revenue of roughly $227 million in the quarter, up 0.2% year over year and, again, better than consensus estimates. Not too bad for a company who’d reportedly only received about 5% of expected April rent at the time of our first article, and ultimately collected just 26% of billed rent.
It’s in the subsequent conference with analysts that the façade shows its cracks. The company withdrew the guidance it had issued in March, and has not yet issued an updated outlook, but did report that, as of Friday, May 8, it had collected 18% of billed May rents, and estimated that May collections were trending slightly better than April’s 26%.
Management stated that it anticipates improved collections in June and beyond, as malls presumably are deemed safe to reopen, though, in a telling moment, did state that: “As a reminder, while many of our retailers were compelled to close during this period, the vast majority of our leases do not abate our tenants’ obligation to pay rent. As we all continue to navigate these difficult and very unprecedented times, we understand and appreciate the challenges… the many challenges our tenants are facing in light of COVID-19. We will work in partnership with our tenants to collect past due rent.” Amid the persistent deferral and abatement requests from tenants, the company said that it’s had ongoing conversations with its own lenders to “defer payments so the outflows match the inflows”.
Additionally, Macerich took measures to preserve liquidity, most notably curtailing redevelopment plans for the remainder of the year by 60%, and drawing much of the remaining capacity on its $1.5 billion revolving line of credit, to end Q1 with $735 million of cash on its balance sheet.
Meanwhile, global shopping dining and entertainment giant Simon Property Group (SPG), who agreed on February 19 to acquire fellow mall REIT Taubman Centers for $3.6 billion – a 50% premium to the share price the day before the deal was announced, and roughly double Taubman’s February 1 share price, had a tougher go of things, but still reported numbers that one would classify as “very bad”, but not “cataclysmic”, as reality suggests they ought to be. SPG’s Q1 2020 funds from operations (FFO) per share of $2.78 both missed the consensus estimates and represented an 8.6% year-over-year drop, while revenue of $1.35 billion was a drop of 6.8% from the previous year, and slightly below estimates.
According to comments on SPG’s analyst call, “Business was off to a good start in January and February”. In light of pandemic-related closures, SPG also withdrew its full-year guidance and provided little in the way of specific forward-looking statements, other than expressing the company’s intention to continue paying a common stock dividend in cash equal to at least 100% of its REIT taxable income, and that the dividend would be announced by the end of June.
SPG has not only substantially reduced non-essential corporate spending and property operating expenses, but has also suspended or eliminated over $1 billion of development and redevelopment projects. With regard to rent collections, the company steered clear of specifics, as it had in April, stating only that it was “in the midst of discussions with our tenants regarding their individual situation… it is not appropriate to comment on specific details or terms at this point due to the confidential nature of those discussions. Each situation is analyzed individually based upon our tenant’s market position, their financial status, and the history and depth of our relationship.”
As of May 11, the company had reopened 77 of its U.S. retail properties, in markets where local and state retail restrictions have been eased. Information is not yet available regarding the performance of these properties.
The objects of SPG’s desire, Taubman Centers, meanwhile, reported Q1 2020 FFO per share of $0.88, missing the consensus estimate of $0.91, and falling short of the $0.95 figure from the same quarter a years ago. Taubman’s number paint a bit of bleaker picture, with FFO was down 15% from a year ago, and adjusted FFO down 7.5%. On the bright side, adjusted revenue came in at $147.4 million, surpassing estimates of $145.9 million. It’s worth noting, however, that this represents an 8% decline from the previous year.
Bloomfield Hills, Michigan-based Taubman did not host a conference call due to its pending sale to SPG, and thus provided no insights into its rent collections in April or May, or the state of any discussions with tenants. According to the company’s filings, sales per square foot in its malls (excluding Tesla) rose about 4.5% year over year in the January-to-February period. However, for the full quarter, comparable sales per square foot decreased 11.6% year over year, while average rent per square foot fell 2.3%. Also, Taubman raised $350 million on its $1.1 billion primary unsecured revolving line of credit ($970 million outstanding as of March 31) and closed a one-year extension of a $65-million secured revolver, to April 25, 2021 (as yet undrawn), and exited Q1 with cash and equivalents of $395.1 million, up from $102.8 million at the end of December 2019.
Brookfield Property Partners felt the impact of the late-quarter freeze, perhaps more quickly than most. The company reported Q1 FFO of $0.33 per unit on revenue of $1.09 billion, down considerably from $0.38 per unit and $1.50 billion a year ago. Brookfield also reported that its April rent collection had only been around 20%, with CEO and Brian Kingston noting that “only eight days into May… it’s a little early, but I would say it’s tracking pretty closely to what we experienced in April.” With regard to arrangements and adjustments to existing rental agreements, he added that “We’re in active dialogue with every single one of our tenants and the conversations ranges from ‘it’s a short-term liquidity issue and I just need time’ for some, to others whose businesses are struggling, and they are looking for more of an abatement. So it’s really going to be literally 2,400 individual negotiations with all of these tenants.’”
Unfortunately, given the tone struck by the landlords that are reliant on rental payments from eateries and retailers for their revenue, this is about as good as it’s going to get for a while. That much of the rent for Q1 had been collected prior to the nation’s malls having to shut their doors papers over some cracks, but the result reported in recent weeks by the industry’s landlords provide a glimpse into just how painful a period it’s been. Understandably – though no less troublingly – those in charge are struggling terribly to provide anything in the way of clarity regarding the industry’s future.
Though malls around the country are beginning to reopen, cracking the door for a theoretical recovery in June. However, particularly at establishments that rely on groups of people gathering in close proximity, it’s exceedingly likely that sales will not immediately rebound to pre-COVID levels. For commercial retail REIT that reliant on businesses that are already struggling to make their rent payments, a nervous and sluggish recovery isn’t going to make it any easier to collect rents. This assumes, mind you, that subsequent lockdowns aren’t required. To the extent that any assumption is safe these days, it’s probably safe to assume that anything resembling a return to normal should not be expected before Q3, with even that calling for some rather rosy lenses.
