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3 REITs to Buy From the Rebounding Retail REIT Industry
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Improving economy, widespread vaccination, boost in shopper confidence and strong consumer spending raise hopes for the Zacks REIT and Equity Trust - Retail constituents in the days to come. With focus on efforts to support omni-channel retailing, as well as essential retail and e-commerce resistant sectors, together with adaptive reuse capabilities and opportunities emanating from consolidations, Simon Property Group (SPG - Free Report) , Realty Income Corporation (O - Free Report) and Regency Centers Corporation (REG - Free Report) are well poised to grow. Nevertheless, store closures, retailers’ bankruptcy filings and higher e-commerce adoption, which have been further intensified by the pandemic, will continue to affect cash flows of the retail real estate landlords.
About the Industry
The Zacks REIT and Equity Trust - Retail industry represents a group of REITs that are engaged in owning, developing, managing and renting space in a variety of retail real estates. Among these are regional malls, outlet centers, grocery-anchored shopping centers and power centers, which include big-box retailers. Also, net lease REITs enjoy the ownership of freestanding properties, wherein both rent and the majority of operating expenses for the properties are borne by tenants. Overall health of the economy, job market and consumer spending are the main drivers of retail REITs. Location of properties and trade area demographics play key roles in determining demand for spaces. While dwindling footfall, store closures and retailer bankruptcies have been bothering this asset category, it is on its rebound path amid an improving economy and solid consumer spending.
What's Shaping the Future of the REIT and Equity Trust - Retail Industry?
Vaccination Drive, Consumer Spending to Drive Recovery: The reopening of the economy, accelerated vaccination program and fiscal stimulus are likely to continue fueling consumer spending, in turn driving the retail real estate market to ride the growth curve. In July, retail sales jumped 10.9% on a year-over-year basis, according to the latest Mastercard SpendingPulse report. This is the 11th consecutive month of growth in retail sales, reflecting more cash in the hand of people. Although people staying indoors had propelled the e-commerce industry to flourish, the widespread vaccination has now helped people regain confidence and step out of their homes. They are now resuming their normal activities, going back to work, hitting the streets, going out for lunch and shopping around. This is driving in-store sales, which made up for 81.9% of the overall retail sales in July, up 15.5% year over year. So retailers’ focus have now shifted from closing of stores to revival of their growth plans, resulting in more demand for physical store spaces and creating opportunities for the retail REITs to flourish.
Structural Changes, Omni-Channel Strategy to be Key Focus: Omni-channel is the focal point for retailers and physical stores will be a vital sales channel over the long run because though there is convenience in online shopping, it cannot replace the benefits and satisfaction of visiting a brick-and-mortar store. Apart from serving as showrooms, physical stores also offer a convenient location for pick-up or exchange of goods, helping retailers counter the increasing costs associated with last-mile delivery. Therefore, as retailers turn more toward the omni-channel strategy for higher customer satisfaction and more loyalty, with the aim of generating higher profits, it is logical for them to not only boost their online presence but also maintain brick-and-mortar stores in best locations, raising hopes for retail REITs that focus on such locations. Moreover, digitally-native brands too are likely to keep boosting their physical presence in the days to come, as part of the omni-channel strategy. This is because opening of stores helps them improve their connection with customers and drive expansion. Therefore, with ebbing of the pandemic concerns, brick-and-mortar stores will continue regaining their popularity in delivering physical experiences apart from becoming valuable in the fulfillment of digital sales.
Repurposing and Conversions to Pick Up Pace: The current situation is prompting adaptive reuse as well as conversions of malls into distribution hubs as these distribution centers, being situated close to the consumers of retailers, facilitate faster delivery of products and aid retailers in improving services, lower costs and make optimum asset utilization. Furthermore, retail REITs are now focusing on adaptive reuse, which includes multifamily, hotel, office and medical components, resulting in the construction of mixed-use real estate destination. However, the structural changes involve huge outlay, and therefore, the ones with solid balance-sheet strength are well poised to opt for such moves.
Store Closures, Retailer Bankruptcies Hurting Demand: Nevertheless, over the past few years, consumers’ habits have transformed at a rapid pace and therefore, traffic at retail real estates have suffered with e-commerce capturing market share from the brick-and-mortar stores. This situation has been aggravated by social-distancing measures as even the reluctant ones, who once favored in-store purchases, started preferring online purchases in order to avoid physical contact and spread of infection. Therefore, with more consumers learning about the convenience of online purchase, higher e-commerce adoption is a major concern for this asset category. Shifting business strategies of retailers to building up an online presence and shuttering of stores at unprofitable physical locations have been resulting in several store closures. Also, retailers unable to cope with competition have been filing for bankruptcies. These trends have been eroding demand for the retail real estate space and raising concerns over cash flows of physical stores and landlords.
Zacks Industry Rank Indicates Bright Prospects
The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #76, which places it at the top 30% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group’s growth potential. Since March, the industry’s FFO per share estimate for 2021 moved 4.6% north. Over the past year, the industry’s FFO per share estimate for 2022 surged 18.7%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Stock Market Performance
The REIT and Equity Trust - Retail Industry has outperformed the broader Zacks Finance sector, as well as the S&P 500 composite so far in the year.
The industry has gained 22.6% during this period compared with the S&P 500’s rally of 20.2%. During the same time frame, the broader Finance sector increased 21.2%.
Year-to-Date Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations) ratio, which is a commonly used multiple for valuing Retail REITs, we see that the industry is currently trading at 18.11X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.72X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.73X. This is shown in the chart below.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 18.39X, as low as 9.84X, with a median of 14.97X.
3 Retail REIT Stocks Moving Ahead of the Pack
Simon Property Group: This retail REIT is a behemoth in its industry and enjoys a portfolio of premium retail assets in the United States and abroad. Adoption of an omni-channel strategy and successful tie-ups with premium retailers have been aiding the company. It is also tapping growth opportunities by assisting digital brands to enhance their brick-and-mortar presence, as well as capitalizing on buying recognized retail brands in bankruptcy. Additionally, Simon Property is exploring the mixed-use development option, which has gained immense popularity in recent years among those who prefer to live, work and play in the same area. Moreover, with solid balance-sheet strength and available capital resources, Simon Property Group looks poised to ride this growth curve and bank on opportunities emanating from market dislocations. Simon Property raised the 2021 FFO per share outlook based on its results so far and expectations for rest of 2021. It has also announced a 7.1% hike in its third-quarter 2021 dividend.
Simon Property Group currently carries a Zacks Rank #2 (Buy). Over the past month, the Zacks Consensus Estimate for 2021 FFO per share witnessed upward revision of 3.8% to $10.21, reflecting analysts’ bullish outlook. The stock has also rallied 9.4% over the past three months.
Realty Income Corporation: This retail REIT derives 95% of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. This boosts the stability of rental revenues and generates predictable cash flows. The company raised the 2021 adjusted FFO per share guidance and increased the 2021 acquisitions volume projections to $4.5 billion. With top industries selling essential goods and a robust balance-sheet position, the REIT seems well poised to grow. Currently, Realty Income carries a Zacks Rank of 2.
The Zacks Consensus Estimate for this year’s FFO per share has been revised 2% upward to $3.57 over the past month, indicating a year-on-year improvement of 5.31%.The stock has appreciated 10% over the past three months.
Regency Centers Corporation: This retail REIT primarily focuses on building a premium portfolio of grocery-anchored shopping centers. Such centers are usually necessity driven and drive a dependable traffic. Particularly, the company’s premium shopping centers are situated in affluent suburban and near urban trade areas, where consumers have high spending power, enabling the company to attract top grocers and retailers. The retail REIT has also issued an improved outlook for 2021. Regency Centers currently carries a Zacks Rank of 2.
Over the past two months, the Zacks Consensus Estimate for the current-year FFO per share witnessed an upward revision of 1.2% to $3.41, calling for a 15.6% increase year on year. The stock has also gained 4.1% over the past three months.
Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.
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3 REITs to Buy From the Rebounding Retail REIT Industry
Improving economy, widespread vaccination, boost in shopper confidence and strong consumer spending raise hopes for the Zacks REIT and Equity Trust - Retail constituents in the days to come. With focus on efforts to support omni-channel retailing, as well as essential retail and e-commerce resistant sectors, together with adaptive reuse capabilities and opportunities emanating from consolidations, Simon Property Group (SPG - Free Report) , Realty Income Corporation (O - Free Report) and Regency Centers Corporation (REG - Free Report) are well poised to grow. Nevertheless, store closures, retailers’ bankruptcy filings and higher e-commerce adoption, which have been further intensified by the pandemic, will continue to affect cash flows of the retail real estate landlords.
About the Industry
The Zacks REIT and Equity Trust - Retail industry represents a group of REITs that are engaged in owning, developing, managing and renting space in a variety of retail real estates. Among these are regional malls, outlet centers, grocery-anchored shopping centers and power centers, which include big-box retailers. Also, net lease REITs enjoy the ownership of freestanding properties, wherein both rent and the majority of operating expenses for the properties are borne by tenants. Overall health of the economy, job market and consumer spending are the main drivers of retail REITs. Location of properties and trade area demographics play key roles in determining demand for spaces. While dwindling footfall, store closures and retailer bankruptcies have been bothering this asset category, it is on its rebound path amid an improving economy and solid consumer spending.
What's Shaping the Future of the REIT and Equity Trust - Retail Industry?
Vaccination Drive, Consumer Spending to Drive Recovery: The reopening of the economy, accelerated vaccination program and fiscal stimulus are likely to continue fueling consumer spending, in turn driving the retail real estate market to ride the growth curve. In July, retail sales jumped 10.9% on a year-over-year basis, according to the latest Mastercard SpendingPulse report. This is the 11th consecutive month of growth in retail sales, reflecting more cash in the hand of people. Although people staying indoors had propelled the e-commerce industry to flourish, the widespread vaccination has now helped people regain confidence and step out of their homes. They are now resuming their normal activities, going back to work, hitting the streets, going out for lunch and shopping around. This is driving in-store sales, which made up for 81.9% of the overall retail sales in July, up 15.5% year over year. So retailers’ focus have now shifted from closing of stores to revival of their growth plans, resulting in more demand for physical store spaces and creating opportunities for the retail REITs to flourish.
Structural Changes, Omni-Channel Strategy to be Key Focus: Omni-channel is the focal point for retailers and physical stores will be a vital sales channel over the long run because though there is convenience in online shopping, it cannot replace the benefits and satisfaction of visiting a brick-and-mortar store. Apart from serving as showrooms, physical stores also offer a convenient location for pick-up or exchange of goods, helping retailers counter the increasing costs associated with last-mile delivery. Therefore, as retailers turn more toward the omni-channel strategy for higher customer satisfaction and more loyalty, with the aim of generating higher profits, it is logical for them to not only boost their online presence but also maintain brick-and-mortar stores in best locations, raising hopes for retail REITs that focus on such locations. Moreover, digitally-native brands too are likely to keep boosting their physical presence in the days to come, as part of the omni-channel strategy. This is because opening of stores helps them improve their connection with customers and drive expansion. Therefore, with ebbing of the pandemic concerns, brick-and-mortar stores will continue regaining their popularity in delivering physical experiences apart from becoming valuable in the fulfillment of digital sales.
Repurposing and Conversions to Pick Up Pace: The current situation is prompting adaptive reuse as well as conversions of malls into distribution hubs as these distribution centers, being situated close to the consumers of retailers, facilitate faster delivery of products and aid retailers in improving services, lower costs and make optimum asset utilization. Furthermore, retail REITs are now focusing on adaptive reuse, which includes multifamily, hotel, office and medical components, resulting in the construction of mixed-use real estate destination. However, the structural changes involve huge outlay, and therefore, the ones with solid balance-sheet strength are well poised to opt for such moves.
Store Closures, Retailer Bankruptcies Hurting Demand: Nevertheless, over the past few years, consumers’ habits have transformed at a rapid pace and therefore, traffic at retail real estates have suffered with e-commerce capturing market share from the brick-and-mortar stores. This situation has been aggravated by social-distancing measures as even the reluctant ones, who once favored in-store purchases, started preferring online purchases in order to avoid physical contact and spread of infection. Therefore, with more consumers learning about the convenience of online purchase, higher e-commerce adoption is a major concern for this asset category. Shifting business strategies of retailers to building up an online presence and shuttering of stores at unprofitable physical locations have been resulting in several store closures. Also, retailers unable to cope with competition have been filing for bankruptcies. These trends have been eroding demand for the retail real estate space and raising concerns over cash flows of physical stores and landlords.
Zacks Industry Rank Indicates Bright Prospects
The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #76, which places it at the top 30% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group’s growth potential. Since March, the industry’s FFO per share estimate for 2021 moved 4.6% north. Over the past year, the industry’s FFO per share estimate for 2022 surged 18.7%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Stock Market Performance
The REIT and Equity Trust - Retail Industry has outperformed the broader Zacks Finance sector, as well as the S&P 500 composite so far in the year.
The industry has gained 22.6% during this period compared with the S&P 500’s rally of 20.2%. During the same time frame, the broader Finance sector increased 21.2%.
Year-to-Date Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations) ratio, which is a commonly used multiple for valuing Retail REITs, we see that the industry is currently trading at 18.11X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.72X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.73X. This is shown in the chart below.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 18.39X, as low as 9.84X, with a median of 14.97X.
3 Retail REIT Stocks Moving Ahead of the Pack
Simon Property Group: This retail REIT is a behemoth in its industry and enjoys a portfolio of premium retail assets in the United States and abroad. Adoption of an omni-channel strategy and successful tie-ups with premium retailers have been aiding the company. It is also tapping growth opportunities by assisting digital brands to enhance their brick-and-mortar presence, as well as capitalizing on buying recognized retail brands in bankruptcy. Additionally, Simon Property is exploring the mixed-use development option, which has gained immense popularity in recent years among those who prefer to live, work and play in the same area. Moreover, with solid balance-sheet strength and available capital resources, Simon Property Group looks poised to ride this growth curve and bank on opportunities emanating from market dislocations. Simon Property raised the 2021 FFO per share outlook based on its results so far and expectations for rest of 2021. It has also announced a 7.1% hike in its third-quarter 2021 dividend.
Simon Property Group currently carries a Zacks Rank #2 (Buy). Over the past month, the Zacks Consensus Estimate for 2021 FFO per share witnessed upward revision of 3.8% to $10.21, reflecting analysts’ bullish outlook. The stock has also rallied 9.4% over the past three months.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Realty Income Corporation: This retail REIT derives 95% of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. This boosts the stability of rental revenues and generates predictable cash flows. The company raised the 2021 adjusted FFO per share guidance and increased the 2021 acquisitions volume projections to $4.5 billion. With top industries selling essential goods and a robust balance-sheet position, the REIT seems well poised to grow. Currently, Realty Income carries a Zacks Rank of 2.
The Zacks Consensus Estimate for this year’s FFO per share has been revised 2% upward to $3.57 over the past month, indicating a year-on-year improvement of 5.31%.The stock has appreciated 10% over the past three months.
Regency Centers Corporation: This retail REIT primarily focuses on building a premium portfolio of grocery-anchored shopping centers. Such centers are usually necessity driven and drive a dependable traffic. Particularly, the company’s premium shopping centers are situated in affluent suburban and near urban trade areas, where consumers have high spending power, enabling the company to attract top grocers and retailers. The retail REIT has also issued an improved outlook for 2021. Regency Centers currently carries a Zacks Rank of 2.
Over the past two months, the Zacks Consensus Estimate for the current-year FFO per share witnessed an upward revision of 1.2% to $3.41, calling for a 15.6% increase year on year. The stock has also gained 4.1% over the past three months.
Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.