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Retail landlords could face tenant distress until 2021, S&P says

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Retail landlords will have to contend with their tenants’ financial distress until at least 2021 as companies defer rent payments and some seek bankruptcy protection, according to S&P Global Ratings.

Though the majority of retail real estate investment trusts carry investment-grade ratings, landlords may not see their credit metrics return to pre-pandemic levels until 2022, S&P analysts wrote in a report Tuesday. S&P has negative outlooks on 29% of North American retail REITs, up from 10% in December 2019.

Retail-focused REITs have been hit especially hard by the pandemic. The credit grader said it may turn more negative on the companies if stress at stores grows and recovery prospects dim.

“We expect a bumpy road to recovery for retail REITs as rent deferrals, risk of write-offs, and the accelerated pace of store closings will impact recovery prospects for retail landlords,” analysts led by Samantha Stevens and Kristina Koltunicki wrote in the report.

Retail REITs with higher exposure to “essential” businesses like grocery stores and banks have had better luck collecting rents than those with more non-essential and distressed tenants, according to the report.

Rent collection has improved in recent months as more shopping centers have reopened and landlords worked to collect delinquent rent or reach deferral agreements with tenants, a positive sign for future months. But the analysts said the continued lifting of restrictions isn’t guaranteed as Covid-19 cases rise and states like California reinstate lockdowns.

Given the uncertainty, retail-focused REITs are likely to face “significant cash flow volatility” in the coming months as companies go bankrupt, tenants seek rent deferrals and bad debt exposures increase.

“We expect malls to face heightened headwinds and believe sustained retail disruption could result in material tenant bankruptcies and write offs, potentially leading to weaker demand for the property type,” the analysts wrote.

Many landlords have already had to contend with a slew of retailer bankruptcies. Mall staples including RTW Retailwinds Inc., the parent company of New York & Co., Brooks Brothers Group Inc. and GNC Holdings Inc. have all sought protection from creditors in recent weeks.

Bloomberg News