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On Jan 9, 2013, we reinstated our long-term Neutral recommendation on Taubman Centers Inc. (TCO - Analyst Report), a retail real estate investment trust (REIT). The decision reflects the company’s decent third-quarter results, portfolio strengthening efforts and a healthy balance sheet. Yet, rising online purchases, huge development and redevelopment pipeline and tough competition remain our plausible concerns.

Why Neutral?

Taubman is currently focusing on expanding through development and reconstruction of properties in major submarkets across the world. The company, which has a tenant base consisting of national retailers, disclosed the addition of full-line stores of Macy’s Inc. (M - Analyst Report) and Bloomingdale’s at the Miami Worldcenter development project in Dec 2013. This inclusion of high quality credit tenants, along with rising occupancy levels ensures a steady source of rental revenues going forward.

Additionally, Taubman’s third-quarter 2013 FFO per share of 89 cents was 3.5% year over year and 2.3% ahead of the Zacks Consensus Estimate. Results reflected better-than-expected revenue growth that was driven by a rise in minimum rents. In addition, with its solid portfolio of best-in-class retail malls that command the highest average sales productivity in the U.S., Taubman is well poised to improve its results in the quarters ahead.

Moreover, the company has established an impressive track record in returning cash to shareholders through regular dividends. Taubman never slashed its common dividend since it went public in 1992. On the contrary, it hiked its payout 16 times since then, leading to a 6.9% compounded annual growth rate (2004–2013). To further enhance shareholders’ value, Taubman initiated a $200 million share buyback program during the third quarter. These activities boost shareholders’ confidence on the stock.

On the flip side, we believe that though the notable development and redevelopment pipeline of Taubman is encouraging, it also increases its operational risks by exposing it to rising construction costs, entitlement delays and lease-ups. Moreover, rise in consumer purchases through catalogs and the Internet could hurt demand for its properties and negatively affect the overall income of this Zacks Rank #4 (Sell) stock.

Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share dipped by a cent to $3.60. For 2014 it remained stable at $3.82.

Taubman is scheduled to report its fourth-quarter 2013 results on Feb 12, after the closing bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at $1.07 per share, depicting year-over-year growth of 7.00%.

Other Stocks to Consider

Investors interested in the REIT-Equity Trust – Retail industry may consider stocks like Cedar Realty Trust, Inc. (CDR - Snapshot Report) and Retail Properties of America, Inc. (RPAI - Snapshot Report). Both stocks carry a Zacks Rank #2 (Buy).

Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.

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