Future Shop closure creates worries for REIT growth prospects

The demise of Future Shop highlights just how much pressure real estate investment trusts will face in the coming years, say analysts.

Best Buy Co. Inc. abruptly shuttered 66 Future Shop stores last week as it faces growing competition from online retailers such as Amazon. com Inc. Mark Rothschild, analyst at Canaccord Genuity, said the closures show that REITs will be pressured as brick-and-mortar retailers continue to lose ground to online competition.

“The next few years are likely to be challenging for retail landlords as they must manage through the impact of Target leaving Canada and many other store closures,” he said. “We expect some small impact on retail REIT vacancy rates, and a more muted pace of net operating income growth over the next few years.”

The closure of the Future Shop stores and the exit of Target Corp. from Canada are among a number of recent retail closures or layoffs to hit Canada.

Mr. Rothschild notes that Calloway REIT was the most significant landlord affected by the Future Shop closures, owning 19 of the closed locations in its portfolio. Those stores only contributed about 3% of Calloway’s annual rental revenue, but the analyst said the closures have a more important impact on future growth than current earnings.

“The REITs/REOC under coverage that are affected by the Future Shop closures are amongst the largest retail landlords in Canada, with well-diversified and broad tenant bases,” he said.

“While there should not be any impact on our estimates since most leases have some term, it is likely to have a negative impact on the growth prospects for some REITs as tenants will have more options for space.”