S&P: Retail REITs Could Face Distress Until At Least 2021

S&P Global Ratings, New York, said retail real estate investment trusts, already buffeted by the coronavirus pandemic and dwindling brick-and-mortar revenues, could see an increase in downgrades in coming quarters with little chance of recovery before next year.

The report noted retail REITs have been one of the most impacted subsectors of real estate since the coronavirus pandemic began, as mandated store closures, physical distancing requirements, and tenant bankruptcies have disrupted a traditionally stable cash flow stream. Retail REIT-specific rating actions thus far in 2020 have largely been downgrades on issuers with immediate liquidity, covenant or credit protection measure issues, as well as several outlook revisions–mostly negative.

“S&P’s already negative rating bias could grow in the coming quarters if retail stress from the pandemic and the recession exceeds our current expectations and hinders recovery prospects,” the report said. “The industry’s recovery prospects are still unclear given how little is known about the virus, containment measures and its longer term impact on consumer shopping habits.

The report, “Retail REITs Will Contend With Retail Distress Until At Least 2021,” also noted the likeliness of “significant cash flow volatility for retail-focused REITs in the second and third quarters of 2020 from rent deferrals, increased bad debt expense and retail bankruptcies, especially as differing accounting methods and management discretion could obfuscate cash rents.”

Additionally, the report said S&P Global Ratings “expects 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. As a result, we think credit metrics may not return to pre-pandemic levels until 2022.”