Key Takeaways
- April rent collections highlight the stress REITs are confronting in the second quarter as the impact of COVID-19 intensifies.
- Retail assets, particularly malls, received some of the lowest levels of rent among rated REITs, and healthcare REITs exposed to seniors housing assets experienced significant operating pressure.
- Although rent collections for office REITs were better than expected in April, social distancing measures and increased work mobility could pressure demand for office space over the intermediate- to longer-term as tenants negotiate lease renewals.
- All property types are affected by COVID-19, though multifamily, industrial, and data centers appear to be more resilient, reporting relatively high rent collections.
- S&P Global Ratings has taken 19 rating actions since early March and expects negative rating activity to continue in 2020 as 18% of ratings have negative outlooks as of May 20, 2020.
- Debt issuance rebounded after some market dislocation in March as the Federal Reserve Bank provided liquidity support and stabilized markets. In our opinion, the REITs generally have solid liquidity and have taken cash preservation measures including dividend cuts.
Disruptions, Deferrals, And Closures
REITs are facing mounting pressure as social-distancing and stay-at-home orders intended to contain the spread of COVID-19 are disrupting tenants. April rent collections, as reported by REITs, paint a grim picture with retail REITs collecting only about 55% of contractual rent obligations and our rated universe collecting about 82%.
Chart 1
S&P Global Ratings expects significant cash flow volatility over the next few months for retail-focused REITs. April rent collections varied, ranging from 10%-30% for malls and outlet centers to 50%-80% for shopping centers and retail-focused net-leased REITs. Although we saw better collectability from landlords with greater percentages of investment-grade tenants and those classified as "essential" and open in March, we were surprised by a number of national tenants that did not pay rent despite having the liquidity. Outlet centers showed the weakest rent collections with Tanger Factory Outlet Centers Inc. collecting only 12% of rent in April. Malls also experienced very low rent collections in the 20%-30% range: Simon Property Group Inc. didn't disclose April rent collections, Brookfield Property Partners L.P. disclosed that their malls collected approximately 20% of rents, Washington Prime Group Inc. collected about 30%, and Macerich (unrated) collected 26%. Strip centers, with greater exposure to essential businesses that remained open such as grocery stores, showed better rent collections. However, their exposure to small businesses could be problematic if these tenants cannot survive a prolonged shutdown. A U.S. Chamber of Commerce/MetLife survey in late March found that 22% of small businesses said they were two months or less from closing permanently.
We think May and June rent collections will remain difficult, with a similar collection rate from April, as most businesses are still closed or just beginning a gradual reopening process with limited capacity. While government stimulus programs such as the Coronavirus Aid, Relief, and Economic Security Act provide modest near-term liquidity relief for many tenants, the amount of assistance granted is unlikely to be enough to avoid a material number of permanent closures. Landlords, particularly owners of retail properties, have set up programs to allow for more payment flexibility and have deferred rents, which are expected to be collected in the future. Given the high level of uncertainty over tenants' financial health, we think a significant amount of deferred rent could be at risk, particularly if there is an increase in tenant bankruptcies, resulting in growing write-offs in subsequent quarters. Moreover, we believe prolonged disruption or a second wave of cases of the virus could result in the inability or unwillingness for additional retailers to pay rent. We have already started to see a growing number of retailers file for bankruptcy protection with JC Penney Co., Neiman Marcus, and J. Crew Group Inc. already pursuing reorganization plans that will likely involve a significant number of store closings. Given the intense pressure in the mall space, we revised the outlook on Simon Property Group to negative.
We expect certain retail categories, such as restaurants, to face protracted pressure from sharp declines in discretionary income and extended periods of social distancing, leading to reduced foot traffic even as official guidelines are lifted, with some customers wary of returning to pre-virus shopping habits. As discussed in "Shakeout In Retail, Restaurant Sectors Begins With J. Crew," approximately 30% of our 125 rated retail and restaurant companies were rated 'CCC+' or lower as of May 4, 2020, implying at least a 1-in-2 chance they will eventually default. We therefore expect heightened retail distress, with the economic impact of the coronavirus pushing some already struggling tenants over the edge. Moreover, we expect heightened demand for omni-channel shopping methods such as "click and collect" and e-commerce deliveries. This, combined with the implications of the recession on discretionary spending, could lead to additional disruption, especially for retailers that fail to evolve. This could pressure occupancy, re-leasing spreads, and same-store net operating income (NOI) growth for our rated retail REITs. That being said, we believe shopping centers are better positioned than malls, with more stores deemed "essential" and open over the past couple of months. We also see the longer-term potential for some mall tenants to move to nonenclosed, off-mall locations.
We expect the healthcare REITs to also be affected by COVID-19, particularly those with significant exposure to seniors housing assets given the disruption at those facilities. We recently revised the outlooks to negative on both Welltower Inc. and Ventas Inc. as we expect their operating performance to deteriorate materially over the coming months as they face significant increases in costs and weakening occupancy at seniors housing properties. On the other hand, we expect life sciences and hospital properties to be well insulated. See "As The Pandemic Pressures U.S. Health Care REITs, Cash Flow Is Key," for a detailed commentary about the projected impact COVID-19 will have on each healthcare facility type.
Other property types experienced a more modest decline in rent collection. Most property types reported fairly resilient rent collection, with rental housing collecting 96% of April rent and office collecting 93% of rents. Likewise, rent collection for industrial was negligibly affected, with our REITs collecting close to full expected rents for April. Still, we believe the market has quickly shifted to a renter's market, with landlords facing increasing pressure for rent concessions and growing vacancies across all property types pressuring the performance of REITs over the next year. Moreover, there is growing uncertainty on the future of office real estate as more workers will likely adopt remote working and demand increased work flexibility while space demand from the co-working sector is vanishing quickly.
The impact of rent deferrals could last beyond 2020, depending on the duration of pandemic and rent collection timelines, which will be different for each REIT, lease, and property type. Some tenants will be placed on cash accounting or require lease modifications based on expectations for rent collectability. However, we expect most U.S. REITs will utilize the recent FASB election to treat deferrals as nonlease modifications, meaning they will not have to remeasure for straight-line rent (provided the leases do not substantially change) and revenue generation will remain relatively intact despite deferrals affecting the timing of collection. As a result, it will take time to see the true impact of deferrals flow through company-reported revenue and bad debt expense disclosures for the majority of tenants. That said, we see more risk of elevated bad debt expenses and write-offs in the coming months and potentially years. It is uncertain at this time what level of deferrals will ultimately be collected. But, we anticipate some deferrals could eventually be forgiven to keep some, especially smaller, tenants in place, counterbalancing the cost of retenanting. However, we believe our REITs will ultimately collect rent from most national tenants that have withheld rent payments.
Performance By Subsector
| Subsector | Comment |
|---|---|
| U.S. strip centers | April rent collection for our rated U.S. strip center REITs varied but was above 50% overall. We believe the majority of our rated strip center REITs are fairly well positioned from a liquidity perspective to weather a few months of rent deferrals. A number of our rated REITs have taken actions to preserve cash, such as scaling back development/nonmaintenance-related capital expenditures (capex) and acquisition activity, cutting or suspending dividends, and drawing down funds on their revolving credit facilities. In addition, most balance sheets have improved over the past few years with minimal near-term maturities due to large refinancing activity in 2019 when interest rates began to decline, positioning our rated REITs better coming into this recession than prior to the last downturn. However, current circumstances are very different from other cycles, which could undermine the resilience of certain retail categories, with many REITs refining their portfolios over the past few years to focus on service, restaurant, and entertainment categories (in addition to nondiscretionary, which we expect to still perform well). Given the uncertainty surrounding the duration of the coronavirus' impact on nonessential retailers, we expect operating performance to be challenged for an unspecified duration of time, which could last longer based on the level of bankruptcies that impact shopping centers. We are monitoring exposure to in-line tenants, especially those in the entertainment, fitness, and restaurant categories, as well as small businesses, which could face cash flow and liquidity issues. |
| Canadian strip centers | April rent collection for Canadian retail REITs was similar to those in the U.S. (aside from above-average collection from Choice Properties from its outsized concentration to Canadian grocer Loblaw). However, there are government aid programs on the horizon that could result in greater collectability in the coming months, such as the Canada Emergency Commercial Rent Assistance (CECRA) program and the recently announced Large Employer Emergency Financing Facility. CERCA will provide assistance to small businesses and aims to ensure landlords receive to up 75% of rent payments. This program should enhance the collectability of First Capital and RioCan's rent from in-line tenants, although we anticipate some tenants could still struggle financially during the recession. Similar to the U.S., we expect heightened retail bankruptcies and store closures, with S&P Global Ratings economists projecting negative 5.3% GDP growth for Canada in 2020. Moreover, e-commerce penetration, which was already increasing albeit at slower pace versus the U.S., has accelerated with a significant number of people quarantined and ordering items online. That said, we believe Canada's lower retail space per capita versus the over-retailed United States provides some protection against store rationalizations while geographic barriers limit outsized e-commerce growth. In addition, both RioCan and First Capital have strengthened portfolio quality through the elimination of many lower-quality properties with weaker operating metrics over the past few years, insulating them from some store closures if retailers retain better locations. However, these REITs operate with higher leverage than their counterparts in the United States, leaving less cushion relative to their downside triggers to withstand prolonged retail pressure on EBITDA generation. |
| Malls | Rent collection for malls was much lower (20%-30% range for those that reported) due to the closure of enclosed spaces and limited tenants deemed as "essential." We believe malls are at heightened risk of near-term impacts from retail distress, with some mall tenants already filing for bankruptcy (True Religion, J. Crew, Neiman Marcus, J.C. Penney) or liquidating stores (Lord and Taylor) and others on the brink. During the quarter, we lowered our ratings on 'B' mall operators, including Washington Prime and CBL to CCC+/negative (we subsequently withdrew our rating on CBL at the company's request). We also revised our outlooks on Simon and Brookfield to negative, anticipating pressure on operating performance for even the best quality malls, as they undergo a wave of tenant bankruptcies, which could lead to weaker prospects for the property type. |
| Net lease |
The range of April rent collections for net-lease REITs was the widest across the different asset classes, spanning from 15% to close to 100%. Those with higher exposure to "experiential" retail took the biggest hit (EPR Properties) followed by traditional retail, which was largely on par with that of strip center REITs at about 50%. However, nondiscretionary retail with a high proportion of investment-grade tenants stood out with healthier rent collection of about 80% (Realty Income and Agree Realty). Finally, those with no exposure to retail were only modestly affected (Lexington). We believe shelter-in-place and stores' shut-down measures nationwide will have a longer-term impact on net lease REITs than that experienced during the previous recession. We expect rent deferrals, rent abatements and concessions will affect REITs through 2020, while distressed tenants, bankruptcies and a changing retail landscape can linger well into 2021 and beyond. However, we consider that some REITs have built sufficient financial cushion to withstand this operating disruption (such as National Retail Properties and VEREIT). We see higher pressure for landlords with elevated exposure to nonessential retail tenants, such as EPR Properties and Service Properties Trust. That said, we believe tenants have less leeway to not pay rents over the longer term, given that single-tenant properties were not physically closed by the landlord (unlike malls). As such, landlords fulfilled their obligations to tenants. |
| Healthcare | Healthcare REITs collected 90%-100% of April rent collections (this excludes the seniors housing operating portfolio assets, where the landlords' revenues and expenses are directly impacted). In general, while rent collections were high across the board in April, we think rent deferrals will accelerate in medical office buildings in May, while rent restructurings could occur for poorly covered seniors housing triple-net leased properties and some skilled nursing facilities over the next year. Some additional rating pressure could occur over the next 12 months, particularly for REITs that have material exposure to seniors housing properties. |
| Office |
Office rent collection was 83%-98% with REITs with exposure to retail at the lower end (e.g., Vornado, SL Green and Boston Properties). In April, office properties collected on average 95% of rent, with the more specialized-niche properties leading the pack (Alexandria and Corporate Office Properties at 98%). This is consistent with our view that office REITs will see limited disruption to their stabilized properties in the short term as a result of the lockdown measures. However, re-leasing as leases expire can be challenging (in average, 6% of office REITs' annualized base rent is set to expire in 2020 and 10% in 2021). In the midterm, we believe construction and leasing of projects under development will be more challenging, potentially delaying EBITDA contribution. It is still uncertain how social distancing will affect the sector's dynamics in the long term. The national lockdown has accelerated economic digitization, and tested productivity and cost efficiencies when working from home. As this test yields positive results, the need for office space at pre-pandemic's magnitude is in question. At the same time, new guidelines for social distancing could require lower density in offices and therefore, potentially offsetting reduction in total space. However, existing office space could require significant retrofitting, hence, increased capex. We believe office REITs with younger properties and developed with high-quality standards, would likely be more attractive for tenants and require less redevelopment spend to comply with potential new guidelines. Big tech companies including Google and Microsoft announced an extended working from home options until 2021, while Facebook, Twitter and Square have announced a more permanent work-from-home structure. We believe additional corporations could follow suit. Additionally, massive layoffs, such as those at Airbnb and Uber, combined with high unemployment could hurt fundamentals given high cyclicality in the sector. We also believe there could be increased migration to more suburban offices, as some companies look to diversify outside of their main corporate headquarters and into more spread-out locations, which could benefit REITs located in non-gateway markets. |
| Multifamily | While a survey found that only 69% of renters paid April rent nationally (not including subsidized housing), cash collections were much higher in our rated REIT universe between the low- to high-90% range. The tenant profile of a typical renter at the properties owned by our REITs is strong, with the majority of tenant households earning well above $100,000 and employed at white-collar, professional jobs (unlikely to be directly affected by the COVID-19 pandemic). Although REITs are currently unable to evict any tenants who don't pay rent, we think the recession will have an impact on both occupancy and rental rate growth over the next year. We currently project same-store NOI declines to average in the mid- to high-single-digit-percent area for 2020, although this projection is highly uncertain given the numerous variables at work. That said, our rated REITs generally had very strong balance sheets and liquidity positions at the onset of the pandemic, and we currently don't anticipate any rating actions to occur in 2020. |
| Industrial |
Industrial rent collection met expectations, with Prologis collecting within 1% of its typical collection in April, and Duke Realty Corp. and First Industrial L.P. collecting over 90% of contracted rents. We expect industrial fundamentals to remain favorable, with e-commerce demand holding steady and heightened interest in domestic supply chains and manufacturing potential fueling additional demand. That said, we still expect some pressure on releasing spreads and occupancy over the next year or two from the pandemic and the resulting recession, especially given the elevated risk of retail bankruptcies. |
| Data centers | Data Center REITs reported normal rent collection for April (we estimate in the mid 90% area), immaterial rent relief requests and strong leasing activity. Data centers are considered mission-critical properties, allowing landlords to maintain largely undisrupted operations in in-service properties and in under construction sites. We expect this trend will continue through 2020 as we believe that tenants rely heavily on its IT infrastructure to maintain businesses operational. In addition, we believe that the credit quality of the tenant base overall for the sector is strong, in particular within the hyperscale segment. Longer term, we believe the temporarily mandated working-from-home guidelines will partially remain in place as a new norm and will add to the already strong demand from data growth and migration to the cloud. In addition, data centers are the only REIT sector that trades at a premium to net asset value (NAV), which can provide data center REITs with additional sources of liquidity to fund growth at an attractive cost. As such, the sector has been very active on equity issuances and the use of its "At The Market" equity offering programs (Equinix, Digital Realty, and QTS). |
| Storage | Rent collection for our storage REITs was in the low-90% area. However, we still expect substantial deterioration in same-store NOI growth in 2020, with many REITs pausing on rate increases for existing customers and not taking action on delinquency rates, which would have resulted in lower occupancy. Moreover, while storage has historically performed well in recessions, we believe this downturn could be different given heightened supply the sector is facing in a number of markets, which could pressure rental rates and occupancy while also delaying the stabilization of new development. In addition, storage leases have a significantly shorter average lease duration, which could further pressure NOI growth, especially if move-outs significantly outpace move-ins. |
Debt issuance rebounded after some market dislocation in March as the Federal Reserve Bank provided liquidity support and stabilized markets. The REITs generally have solid liquidity and have taken cash preservation measures including dividend cuts.
Debt issuance rebounded after the Federal Reserve Bank implemented programs to inject liquidity and help stabilize capital markets in March. Investment-grade issuers returned to the markets to bolster liquidity in a low-rate environment. The investment-grade corporate bond market in the U.S. reached record levels of issuance so far this year and REITs that are more resilient to the pandemic tapped the bond markets despite wider credit spreads. Even with the recent spike in issuance, REIT debt issuance stands at much lower levels compared to a strong 2019, with about $13 billion of senior debt as of April compared to $22.6 billion in 2019, representing a 43% decline. Equity issuance also remained weak at $5.4 billion as of April compared to $8 billion in 2019 as most REITs find it highly dilutive to issue equity at current prices given that most sectors trade well below NAV. Retail, hotel, and office sectors trade at the widest discounts to NAV, while data centers continue to trade at a modest premium. For more on publicly traded REITs, see "NAV Monitor: US REITs Close April At Median 23.9% Discount To NAV."
We expect debt issuance to slow over the coming months as there is limited need to raise funds. REITs are pulling back acquisitions and development projects, limiting their need for financing. We expect debt issuance to be significantly below 2019 levels given the tough comparison as debt issuance in 2019 reached a record of $70 billion (with a majority issued in the second half of 2019). Moreover, the vast majority of REITs have minimal maturities over the next 12 months, so refinancing needs are low.
Given the low level of rent collections, cash flow will come under pressure and we expect the second quarter to be the weakest in advance of a projected sequential recovery in the second half of 2020 (year-over-year comparisons will still be extremely challenging). Facing a potential cash crunch given poor rent collections, many REITs have incurred additional borrowings to bolster liquidity. In addition, many REITs have announced dividend cuts, cost reductions, and cutbacks in development spending and other capex to help preserve liquidity. We currently believe most REITs have good liquidity, with adequate levels of cash or access to capital to withstand the near-term pressure. Moreover, we believe REITs have entered this recession in relatively better shape than where they were prior to the last recession, given lower debt leverage, a larger pool of unencumbered assets, and a well-laddered debt maturity profile.
Chart 2
Negative rating activity continued in April as the North American REIT sector felt the impact of the COVID-19 pandemic and resulting recession. We have taken 19 rating actions since early March and expect negative rating activity to continue over the next year as we monitor the potential for a recovery in real estate demand and REITs progress in restoring credit metrics to pre-pandemic levels. About 18% of the rated portfolio have negative outlooks and our outlook horizon is generally 12-24 months. We expect cash flows to come under pressure in 2020 with all property types subject to demand pressure as tenants' financial health deteriorates. We expect an economic recovery in 2021 to help mitigate downside risk and expect the REITs to maintain financial policies that will support a recovery of credit metrics in 2021 and beyond with limited acquisitions, development, or share repurchase activities.
Chart 3
Chart 4
Table 1
| U.S. REIT Rating Actions: March 1-May 20, 2020 | |||||
|---|---|---|---|---|---|
| Company | Analyst(s) | Date | To | From | Rationale |
|
Diversified Healthcare Trust |
Nicolas Villa | March 11, 2020 | BB/Stable/-- | BB+/Negative/-- | The downgrade reflects DHC's weaker-than-expected guidance for its senior housing operating portfolio (SHOP), as we had expected this property type to stabilize somewhat in 2020 following a year of sharp declines. DHC's total portfolio same-property cash net operating income (NOI) declined 19.2% in the fourth quarter of 2019 compared to the same period of last year and was down 14.8% for full-year 2019. The decrease was primarily driven by the previously announced restructuring agreement with Five Star that resulted in an approximately 37% rent cut as well as the conversion of its leases into managed contracts that went into effect on Jan. 1, 2020. |
|
CBL & Associates Properties Inc. |
Kristina Koltunicki | March 17, 2020 | CCC+/Negative/-- | B/Negative/-- | The downgrade reflects our view that CBL's capital structure is unsustainable as we believe refinancing prospects for the company will remain difficult as it becomes more likely that mall traffic and tenant bankruptcies because of the COVID-19 pandemic will place additional pressure on the company's business prospects and financial metrics. We previously forecast that operating conditions could improve in 2021; however, we believe the near-term complications from the pandemic could result in longer-term consequences such as increased bankruptcies and store closures that further weaken the company's already fragile economic state. |
|
CBL & Associates Properties Inc. |
Kristina Koltunicki | March 17, 2020 | N/R | CCC+/Negative/-- | Issuer request |
|
Washington Prime Group Inc. |
Samantha Stevens | March 20, 2020 | CCC+/Negative/-- | BB-/Negative/-- | The downgrade reflects our view that Washington Prime is at risk for a covenant breach in the second quarter of 2020. While we acknowledge there is still much uncertainty surrounding the duration of coronavirus' impact on the U.S., we believe that its effect on WPG's challenged 'B' malls--which were already undergoing a continued secular decline--will prove highly unfavorable. Moreover, we expect small shop tenants within the company's open-air portfolio to struggle and request rent deferrals and concessions. The result will be significant EBITDA declines for an uncertain length of time. As such, we expect continued deterioration in headroom for Washington Prime's tightest covenant--the total indebtedness to total assets ratio--so much so that the company could be at risk of breaching this covenant should retail stores remain closed for an extended period, causing EBITDA to decline substantially and impairing asset values. |
|
Tanger Factory Outlet Centers Inc. |
Kristina Koltunicki | March 27, 2020 | BBB/Negative/-- | BBB/Stable/-- | The negative outlook reflects our concerns about the potential negative effects of the coronavirus pandemic on Tanger's sales and cash flow. We believe Tanger's operating results may be even weaker than we previously expected, which will likely depress its credit metrics. The company's reported a 0.4% decrease in its same-center NOI during the fourth quarter of 2019, a 0.7% decrease for the full year, and issued weaker-than-expected guidance for 2020. This decline was due primarily to tenant bankruptcies, lease modifications, and store closures. The spread of the coronavirus has led to mass store closures and a decline in consumer spending on discretionary merchandise, which could further pressure our forecast relative to our already lowered assumptions for 2020. |
|
Agree Realty Corp. |
Samantha Stevens | March 30, 2020 | BBB/Stable/-- | N/R | Agree operates a high-quality portfolio of retail assets net-leased to primarily investment-grade tenants. As of March 24, 2020, the company's portfolio consisted of 864 properties in 46 states, leased to over 180 tenants across 28 retail industries. Substantially all of Agree's tenants are subject to net-lease agreements, which require tenants to pay for minimum monthly rent and property operating expenses, limiting cash flow volatility. At fiscal year-end 2019, the portfolio was 99.6% leased with a weighted-average remaining lease term of approximately 10 years and minimal lease expirations over the next few years. |
|
Mack-Cali Realty Corp. |
Michael Souers | March 31, 2020 | B+/Negative/-- | BB-/Negative/-- | The downgrade reflects our view that the economic recession, resulting from the COVID-19 pandemic, will likely hurt CLI's operating performance and constrain its ability to execute on asset sales as anticipated, deteriorating credit metrics further. |
|
EPR Properties |
Samantha Stevens | March 31, 2020 | BBB-/Negative/-- | BBB-/Stable/-- | EPR Properties' operating performance could be materially hurt in the second quarter by the COVID-19 pandemic, with the potential for many properties to be closed for an unknown period of time. EPR's portfolio has significant exposure to nonessential properties, which could suffer steep declines in cash flow amid prolonged social-distancing orders and mandated closures. Most of EPR's tenants are unrated or speculative-grade tenants operating within the experiential space, including theaters (45% of annualized revenue as of Dec. 31, 2019), eat and play facilities (23%), and attractions including ski resorts (14%), among others. |
|
Service Properties Trust |
Nicolas Villa | April 2, 2020 | BB+/Watch Neg/-- | BBB-/Negative/-- | The downgrade reflects our expectation that SVC's operating performance, particularly in its hotel segment, will be negatively affected by the recent COVID-19 pandemic such that we anticipate its revenue per available room will decline significantly for 2020. |
|
CareTrust REIT Inc. |
Nicolas Villa | April 6, 2020 | BB-/Stable/-- | BB-/Positive/-- | We are revising the outlook to stable from positive given the recent COVID-19 pandemic and our expectation that the forthcoming economic fallout will likely pressure its operator rent coverage levels over the next year while delaying a significant portion of its acquisition activities into 2021. |
|
Corporate Office Properties Trust |
Fernanda Hernandez | April 6, 2020 | BBB-/Stable/-- | BBB-/Positive/-- | We believe COPT's properties are relatively well positioned to weather the economic recession as these are largely critical assets for defense/IT and cyber security operations for the U.S. government agencies and contractors. As a result, we do not expect a material deterioration in the company's operating performance. However, we believe it is unlikely that the company will reduce leverage below 5.5x, our trigger for an upgrade in the short to medium term. |
|
Regency Centers Corp. |
Kristina Koltunicki | April 6, 2020 | BBB+/Stable/-- | BBB+/Positive/-- | We believe the COVID-19 pandemic will pressure Regency's operating and credit protection measures over the next year, as we anticipate the company will need to give rent deferrals to an unspecified amount of tenants. While the majority of Regency's portfolio is grocery-focused and located in densely populated, affluent coastal markets that have high barriers to entry, we believe Regency will be unable to deleverage to the low-5x area over the next 12 months, which is a trigger for an upgrade. |
|
W.P. Carey Inc. |
Michael Souers | April 6, 2020 | BBB/Stable/-- | BBB/Positive/-- | We see limited operating disruption at WPC's operating properties, in general, given its well diversified portfolio by property type, geographies, and tenants under triple-net leases. We also think its long-term leases and contractual rent increases, will likely provide additional resiliency through this economic downturn. Moreover, WPC's portfolio largely consists of sale and lease back properties, which we believe further increases tenant's willingness to maintain those properties operational. However, we believe it's unlikely that WPC will reduce debt to EBITDA further from the 6x it showed as of year-end 2019. |
|
Brookfield Property partners L.P. |
Michael Souers | April 8, 2020 | BBB/Negative/-- | BBB/Stable/-- | BPY's retail properties are likely to face material pressure in the second quarter, exacerbating the secular challenges in retail. |
|
Columbia Property Trust Inc. |
Kristina Koltunicki | April 15, 2020 | BBB/Negative/-- | BBB/Stable/-- | Columbia Property Trust's leverage is likely to remain elevated throughout 2020. We are revising our outlook on Columbia Property Trust Inc. to negative from stable to reflect our view that its leverage will remain elevated through 2020 from flattish EBITDA and some incremental debt. In addition, we believe that store closures related to the COVID-19 pandemic could lead a small number of tenants to request rent deferrals, further pressuring cash NOI over the near term. |
|
American Campus Communities Inc. |
Samantha Stevens | April 24, 2020 | BBB/Negative/-- | BBB/Stable/-- | Prolonged social distancing and limitations on group gatherings associated with COVID-19 could materially affect ACC's cash flow generation beyond the next few months. As a result of the pandemic, most colleges across the U.S. have switched to online instruction, and we believe some campuses could remain closed for the duration of the crisis to slow the spread of the virus. |
|
Retail Opportunity Investments Corp. |
Samantha Stevens | April 28, 2020 | BBB-/Negative/-- | BBB-/Stable/-- | Sustained declines in cash flow amid prolonged social distancing and store closures could impair ROIC's portfolio. We expect significant earnings pressure in second quarter from rent deferrals for nonessential tenants and are uncertain whether conditions will improve in the back half of the year. |
|
Simon Property Group |
Michael Souers | April 28, 2020 | A/Negative/-- | A/Stable/-- | The pandemic has placed mounting pressure on mall REITs as mandated stay-at-home restrictions and store closures create a tense dynamic between landlords and their tenants. Retail and restaurant tenants in malls and outlet centers are at the crux of the shutdown given that many are considered nonessential and their physical footprint largely remains shuttered. Many national tenants have publicly stated that they will not pay rent for April, leaving Simon and other landlords at an impasse on how to manage their relationships with the tenants that are not abiding by their contractual obligations. That said, we believe many landlords, such as Simon, will consider offering rent deferrals for qualifying tenants as long as their properties remain closed. It is unclear how this dynamic will unfold over the next few months, though we anticipate increased operating volatility, that deferrals will turn into concessions or even write-offs due to bankruptcies, and potential longer-term changes in consumer behavior due to the recession and the pandemic's effect on Simon's portfolio. |
|
Welltower Inc. |
Kristina Koltunicki | May 11, 2020 | BBB+/Negative/A-2 | BBB+/Stable/A-2 | Welltower's assets are highly vulnerable to pressure caused by the COVID-19 pandemic, given the company's significant exposure to seniors housing assets. As of March 31, 2020, 62.3% of its property-level net operating income (NOI) was generated from seniors housing facilities, including 42.9% from SHOP assets. S&P Global Ratings thinks these assets are the most vulnerable to cash flow pressure during the COVID-19 pandemic, for myriad reasons. |
|
Ventas Inc. |
Kristina Koltunicki | May 11, 2020 | BBB+/Negative/-- | BBB+/Stable/-- | The COVID-19 pandemic will likely pressure Ventas' assets significantly, particularly senior housing properties. As of March 31, 2020, 55% of Ventas' NOI was generated from senior housing facilities, including 33% from SHOP assets. While SHOP assets will incur cash flow pressure immediately, thinly covered triple-net leased assets will also require significant rent reductions, in our view. We think senior housing properties are vulnerable to cash flow pressure during the COVID-19 pandemic. |
|
Service Properties Trust |
Nicolas Villa | May 20, 2020 | BB/Negative/-- | BB+/Watch Neg/-- | We believe significant EBITDA deterioration, in particular for SVC's hotels segment, along with the postponement of asset sales will significantly raise leverage in 2020. The downgrade reflects our expectation even considering a modest economic recovery in the second half of 2020, SVC's key credit metrics will likely rise substantially over the next year given delayed asset sales and material EBITDA deterioration in its lodging segment. |
Table 2
| Nonstable Outlooks | |||
|---|---|---|---|
| Issuer | Category | Rating | Outlook |
| Simon Property Group Inc. | Retail | A | Negative |
| Boston Properties Inc. | Office | A- | Negative |
| Dawn Acquisitions LLC | Specialty | B | Negative |
| Mack-Cali Realty Corp. | Office | B+ | Negative |
| Service Properties Trust | Retail/triple-net | BB | Negative |
| American Campus Communities Inc. | Rental Housing | BBB | Negative |
| Brookfield Property Partners L.P. | Office | BBB | Negative |
| Columbia Property Trust, Inc. | Office | BBB | Negative |
| Tanger Factory Outlet Centers Inc. | Retail | BBB | Negative |
| EPR Properties | Retail/triple-net | BBB- | Negative |
| Retail Opportunity Investments Corp. | Retail | BBB- | Negative |
| Ventas Inc. | Healthcare | BBB+ | Negative |
| Welltower Inc. | Healthcare | BBB+ | Negative |
| Washington Prime Group Inc. | Retail | CCC+ | Negative |
This report does not constitute a rating action.
| Primary Credit Analyst: | Ana Lai, CFA, New York (1) 212-438-6895; ana.lai@spglobal.com |
| Secondary Contacts: | Michael H Souers, New York (1) 212-438-2508; michael.souers@spglobal.com |
| Samantha L Stevens, New York + 1 (212) 438 1888; samantha.stevens@spglobal.com | |
| Fernanda Hernandez, New York (1) 212-438-1347; fernanda.hernandez@spglobal.com |
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