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Tenant Mix and Financial Stability

The financial health of a Retail Center can be tied closely to the tenants of the center. As a result, we pay close attention to both the tenant mix and the financial condition of the tenants when examining a retail center.

Tenant Mix

A healthy tenant mix includes a wide range of retail sectors such as apparel, electronics, grocery, entertainment, and dining. This diversity attracts a broader customer base and reduces the risk associated with market fluctuations affecting any single retail sector. Tenants should complement each other, creating a synergistic effect that encourages consumers to visit multiple stores in one trip.

• Weighted Average Lease Term (WALT). Once metric we use to evaluate a center is the weighted average lease term or WALT. As suggested by its name, this metric measures the remaining lease term at a center, weighted by how much that lease contributes to net income. Essentially WALT measures of the current stability of the predicted income stream for the center. The stability indicated by WALT should also be analyzed in the context of the tenant mix. A property may have a high WALT due to a few large, long-term leases. If these tenants are stable, well-performing retailers, this contributes positively to income stability. However, if significant income is tied to tenants in declining sectors, the apparent income stability may be misleading.
• Anchor Tenants. These are large, well-known retailers or department stores that draw significant foot traffic to the center. Their presence is critical for attracting smaller, specialty tenants and customers. These are the basic building blocks of a retail center.
• Supporting Tenants. While anchor tenants draw customers, small or boutique tenants add unique value, catering to specific customer interests and enhancing the shopping experience.

Tenant Financial Stability

In the ever changing retail landscape, an understanding of which tenants are succeeding and failing can be the determining factor in whether a property should be purchased or passed by. Investigation into the performance of the company as a whole as well as the specific location is important, as the parent company of well performing stores can still go bankrupt, and a company that is doing well may close underperforming locations. We review each of the key factors below in determining the financial strength of an asset.

• Performance (within market competition). Sales reports, when available, are a valuable source of information that gives direct insight into retailer performance year over year. Without sales reports, there are other metrics than indicate tenant health. We utilize mobile tracking data to track up to date counts of foot traffic. This data can be used to compare to previous years traffic or to other locations in the market to assess how tenants stack up against the competition.
• Credit Reports and Financial Statements. For public companies, credit reports are available for review from reputable credit agencies. This provides insight into the tenant’s credit history, including past lease obligations, loan repayments, and any defaults or bankruptcies. For private companies, financial statements may be on file or available upon request. Reviewing their outstanding debts, and payment history. We analyze their balance sheets, income statements, and cash flow statements for a deeper understanding of their financial stability. High levels of debt or consistent losses may signal potential risks.
• Rental History. Examining an existing tenant’s rental history offers insights into their reliability and behavior as a lessee. This includes their track record of paying rent on time, adherence to lease terms, and their willingness to renew at option rates. Positive rental history indicates a responsible and stable tenant likely to continue similar behavior, whereas red flags like disputes and rent negotiation with previous landlords might warrant caution.
• Lease Guarantees. Lease guarantees, especially those backed by a financially stable guarantor, enhance a tenant’s creditworthiness by providing additional security for the lease obligations. Guarantees can come from corporate entities or personal guarantors and serve as a commitment to cover rent and other lease-related costs should the tenant fail to do so. The presence of a solid lease guarantee suggests a lower risk profile for the tenant, as it reduces the landlord’s exposure to potential default.