How This REIT Is Staying One Step Ahead of the Retail Apocalypse

By: , Contributor

Published on: Feb 13, 2020

This mall owner has been proactive so that the barrage of retail store closings doesn't permanently impact its bottom line.

Retailer bankruptcies and store closing are having a major impact on retail property owners like real estate investment trusts (REITs). The sector as a whole underperformed other REITs last year because retailers continued to vacate space, which weighed on occupancy levels and rent growth.

Industry conditions, unfortunately, haven't gotten any better this year as several retailers have announced new store closings, including Pier 1 Imports (NYSE: PIR) and Macy's (NYSE: M). Those closings will have an impact on REITs that own properties leased to these troubled retailers.

While no retail REIT is immune from this downturn, Brookfield Property Partners (NYSE: BPY) and its REIT subsidiary Brookfield Property REIT (NYSE: BPR) have been able to stay a step ahead of the apocalyptic conditions in the retail sector. That was one of the central themes on the real estate company's fourth-quarter conference call.

A temporary blip

Brookfield Property's management team addressed the impact that retail bankruptcies are having on their retail portfolio during that fourth-quarter call. CFO Bryan Davis noted that funds from operations (FFO) in the company's retail segment declined about 20% year over year due to several factors, including asset sales, higher expenses, and store closings.

Davis then discussed the effect bankruptcies have had on its same-store results, noting that they were down 3% in the period due to this issue. He stated, "These bankruptcies, which aggregate about 3.2 million square feet (over the last 24 months), have put pressure on our same-property results, which otherwise were flat on a period-over-period basis."

Davis then noted that: "We have made significant progress in re-leasing 75% of that space at higher rental rates. So we expect this impact to be only temporary."

CEO Brian Kingston later stated that the company expects "to have the rest of it leased up this year." Because of that, Kingston believes that "you should start to see the bounce back (in its financial results) this year."

Being proactive at the first sign of trouble

One reason Brookfield expects to quickly overcome the impact of store closings is that it typically knows they're coming well in advance. Kingston, for example, commented on Macy's recent announcement that it would close another 125 of its stores, noting that 14 are in Brookfield-owned properties. He then stated:

"We knew about all of them. We obviously work closely with all of the major department stores around which stores are performing, which ones aren't. So I don't think there was anything that was a surprise there."

Because the company knew which Macy's stores were struggling and likely to close, it already has "plans in place for most of them," said Kingston. As a result, the upcoming vacancies won't have a long-term impact since the company already knows what it intends to do with the vacated space.

Thinking outside the box

Another notable retailer closing stores is Forever 21, which filed for bankruptcy last year. The fashion retailer initially expected to shutter 178 of its locations. However, it has been working with landlords to save some of those stores. Because of that, Kingston noted on the call that Forever 21's bankruptcy didn't impact its fourth-quarter results since it hadn't closed stores at any of its properties.

Forever 21's bankruptcy might have no effect on Brookfield at all because it's teaming up with fellow mall owner Simon Property Group (NYSE: SPG) and brand management company Authentic Brands to save the company. The trio recently reached a deal to buy Forever 21's assets out of bankruptcy for $81 million. That will enable them to keep many of Forever 21's locations open so that the companies can continue collecting rent.

The trio has had success with rescuing a troubled fashion retailer in the past as they teamed up to buy Aeropostale in late 2016. That deal has worked out well as the retailer has returned to profitability, enabling it to continue paying rent at malls owned by Simon and Brookfield.

Taking things into its own hands

While several retailers have closed locations at Brookfield-owned properties, the company has been able to quickly find new tenants. That's because it pays close attention to the performance of its tenants, so it knows of issues well in advance. By identifying what's likely coming, the company has been able to quickly put plans into action to find new tenants for upcoming vacancies or keep existing ones in place by acquiring them out of bankruptcy.

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Matthew DiLallo owns shares of Brookfield Property Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.