National REIT's Shift to Grocery-Anchored Centers Pays Off During Pandemic
Weingarten Realty Inc.'s shift to grocery-anchored centers is paying off during the pandemic as surging sales from its grocery tenants softened some of the damage it saw from other retail tenants suffering from a catastrophic drop in sales. Fine dining restaurant tenants such as Morton's Steakhouse and Cheesecake Factory were more likely to seek rent deferrals in April compared to other restaurant and retail categories, Weingarten Realty executives said during a May 8 earnings call.
Weingarten Realty, a Houston-based real estate investment trust with 167 properties in 16 states, reported net income of $52.6 million in the first quarter, a 5.8% gain year-over-year compared to the same time last year. The increase was mostly because of properties it sold, but that was partially offset by $9 million in bad debt expenses and uncollectable revenue related to the coronavirus pandemic, the company said its latest earnings report. Its revenue dropped 9.6% year-over-year to $111.35 million, missing analyst expectations by about $5.59 million, according to Seeking Alpha.
The national retail REIT has arranged for 700 individual lease deferments, resulting in about $10 million in deferred income for the month of April, Johnny Hendrix, the firm's executive vice president and chief operating officer, said on the earnings call.
Restaurants make up about 19% of Weingarten Realty's rental base, including about 10% full-service restaurants that were less likely to pay in April compared to other tenants as widespread lockdowns temporarily closed sit-down dining across the country.
About 60% of Weingarten’s restaurant lease base is with local tenants such as Chinese or Mexican food restaurants; about half of those tenants paid rent in April, the company said. Chain restaurants such as Red Lobster and Olive Garden make up about 30% of its restaurant base, and about 45% of those tenants paid April rent. Fine dining restaurants such as Morton’s make up about 10% of its restaurant tenant base, but only 20% of those tenants made rent. Weingarten Realty, however, expects those fine dining and chain restaurants to eventually make payments.
"I would say the discussions [with the fine dining, full service restaurants] are very professional … I think we'll work something out. Whether or not we get anything in May, I’m uncertain. I think with these guys, Cheesecake Factory, I think we’ll be able to work something out and we’ll get reimbursed for the money we defer," Hendrix said.
Cheesecake Factory Inc., the owner of the namesake restaurant as well as Fox Restaurant Concepts' North Italia and Flower Child, previously warned its landlords it wouldn't make rent as its restaurants were closed nationwide. The chain, which suffered a 13% drop in sales in the first quarter, expects to begin reopening restaurants in some states this week as stay-at-home orders are being relaxed.
For Weingarten Realty's Houston portfolio, lower rent collections from fine dining establishments in Post Oak and River Oaks shopping districts lowered its overall rent collections in Houston to 58%, Hendrix said.
Overall across the company's property portfolio, Weingarten Realty has collected about 60% of its total expected rental payments in April. But several tenants who paid April rent have negotiated deferrals for May, which will "likely temporarily reduce the cash collections over the next couple of months,” the company said in its earnings report. Rent collections are expected to pick up in the last half of 2020 and throughout 2021 as economies reopen and begin to recover, the company said.
Weingarten Realty benefited from its ongoing emphasis on grocery-anchored retail centers. About 43% of its tenant base were considered so-called essential retail and allowed to operate under most local lockdowns, such as Whole Foods, Kroger, Office Depot, Home Depot, Kroger, H-E-B and Albertson’s. Grocery stores, and grocery delivery services have seen sales soar in the first quarter as panicked shoppers stocked up on goods.
"While we have challenges as we move forward, the multiyear transformation of our portfolio has certainly made the road ahead easier," Drew Alexander, CEO of Weingarten Realty, said on the earnings call.
Even with its emphasis on grocery retail, Weingarten Realty has plenty of so-called nonessential retail tenants that have been forced to close stores during stay-at-home orders. Three of its top 10 tenants were impacted by social distancing closures, including TJX Cos. — the owner of T.J. Maxx, Marshalls and Home Goods, which leases 35 locations from Weingarten Realty — as well as Ross Stores Inc., 24 Hour Fitness and Bed Bath & Beyond.
Overall, 38% of its portfolio comprises nonessential retail tenants, including 10% in the service industry and 8% in discount apparel, according to its latest earnings report. Among nonessential tenants, just 46% made April rent payments.
In addition to removing its 2020 guidance, Weingarten Realty cut its dividend to 18 cents per share, a 54% decrease from its prior dividend of 40 cents per share, to hedge against the uncertain future.
To increase its liquidity, Weingarten Realty drew down $497 million of a $500 million revolving credit facility in the first quarter. It has about $501 million of cash and cash equivalents on hand and no material debt maturities through October 2022.
In the first quarter, it sold $73 million worth of properties, including three shopping centers in Texas and a center in Aurora, Colorado. It also purchased the Trader Joe’s-anchored Village Green Center in Wellington, Florida, and Stevens Creek Corner in San Jose, California.
Weingarten Realty does not expect the pandemic to delay the timing of its major developments under construction, including the residential tower The Driscoll at River Oaks in Houston and the mixed-use project Centro Arlington in Arlington, Virginia.
"These are good projects and while there may be some short-term issues, longer term, these are great properties," Alexander said.
