Zacks REIT and Equity Trust - Retail industry constituents are poised to benefit from the renewed enthusiasm of shoppers for an exclusive in-store shopping experience following the pandemic downtime. Efforts to support omni-channel retailing, adaptive reuse capabilities and opportunities emanating from consolidations, and focus on e-commerce resistant sectors have poised Simon Property Group, Inc. ( SPG Quick Quote SPG - Free Report) , Kimco Realty Corporation ( KIM Quick Quote KIM - Free Report) and Tanger Factory Outlet Centers, Inc. ( SKT Quick Quote SKT - Free Report) well for growth. However, inflationary pressure and economic slowdown might cast a pall on recovery. Rising borrowing costs and labor market pessimism are likely to weigh down on consumers’ willingness to spend to some extent. Also, higher e-commerce adoption might continue to affect retail landlords’ cash flows. Industry Description
The Zacks REIT and Equity Trust - Retail industry embodies a group of REITs 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, including 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 the tenants. The overall health of the economy, job market and consumer spending are the main drivers of retail REITs while property locations and trade area demographics play key roles in demand determination. Although dwindling footfall, store closures and retailer bankruptcies were bothering this asset category in the past, it is on its recovery on shoppers’ renewed enthusiasm for an in-person shopping experience.
What's Shaping the Future of the REIT and Equity Trust - Retail Industry?
Renewed Enthusiasm for In-Store Shopping Experience to Fuel Recovery: This industry is poised to benefit from the renewed enthusiasm of shoppers as they look for an exclusive in-store shopping experience following the pandemic downtime. As such, the landlords remain upbeat about the ongoing holiday shopping season. Also, the optimistic view of retailers for long-term growth is likely to act as a tailwind. Amid this, retailers’ focus has now shifted from the closing of stores to the revival of their growth plans, resulting in more demand for physical store spaces and paving the way for the retail REITs to experience gains in leasing activity, pricing power and flourish. Moreover, retailers are focusing on investments in their stores because apart from serving as showrooms, physical stores offer a convenient location for pick-up or exchange of goods, helping retailers counter the increasing costs associated with last-mile delivery. Limited New Supply and Rapid Formation of New businesses to Drive Leasing: Comparing to the pre-pandemic levels, the construction of new retail space remains dreary. Moreover, lease signings, rent and occupancies in retail real estates are likely to get a boost from limited new supply, the waning of pandemic concerns and the rapid formation of new businesses in the retail sector. Omni-Channel Strategy, Structural Changes in Focus: Omni-channel is the focal point for retailers. 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. This is quite evident from the recent foot traffic at retail destinations. Moreover, digitally-native brands are likely to keep boosting their physical presence in the days to come as part of the omni-channel strategy since the opening of stores helps them to improve their connection with customers and drive expansion. In fact, for retailers, the focus now is not only on increasing their online presence but also on maintaining brick-and-mortar stores in the best locations, which in turn is raising hopes for retail REITs that focus on such locations. Also, with the waning impact of the pandemic, entertainment and dining concepts are seeing a revival, boosting retail REITs’ growth opportunities. Repurposing and Conversions Pick Up Pace: 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 destinations. In fact, the mixed-use development option has gained immense popularity in recent years as it helps to catch the attention of people who prefer to live, work and play in the same area. Moreover, the open-air format and pick-up concepts have been helping landlords to lure tenants. Also, the conversion of malls into distribution hubs has accelerated as these distribution centers, being situated close to consumers of retailers, facilitate faster delivery of products and aid retailers in improving services, lower costs and make optimum asset utilization. Inflationary Pressure, Economic Slowdown Cast a Pall on Recovery: Higher material and operating costs remain a concern for the retailers and this, in turn, might cast a pall on their landlords’ cash flows. Moreover, a slowdown in the economy and the depletion of savings, rising borrowing costs and labor market pessimism is likely to weigh down on consumers’ willingness to spend to some extent. Higher E-commerce Adoption to Remain a Concern: Consumers’ habits have transformed at a rapid pace over the past years and traffic at retail real estates has suffered, with e-commerce capturing market share from brick-and-mortar stores. With the pandemic's impact waning, mall traffic has rebounded significantly. Yet, given the convenience it offers, online shopping is likely to remain a popular choice among customers. This might adversely impact the market share for brick-and-mortar stores. 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 #93, which places it in the top 37% 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 April, the industry’s FFO per share estimate for 2022 has moved 1.1% north. 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 Performance Mix With Sector & S&P 500
The REIT and Equity Trust - Retail Industry has underperformed the broader Zacks Finance sector over the past year but outperformed the S&P 500 composite.
The industry has declined 13.2% during this period compared with the S&P 500’s fall of 15.1% and the broader Finance sector’s decline of 9.2%. One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations), which is a commonly used multiple for valuing Retail REITs, we see that the industry is currently trading at 14.57X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.89X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.90X. 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 18.49X, as low as 10.20X, with a median of 15.39X.
3 Retail REIT Stocks to Consider
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. The 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.
Its third-quarter results reflected healthy operating performance, solid leasing activity and a rise in occupancy levels. Simon Property also announced a 2.9% sequential hike and a 9.1% year-over-year increase in its fourth-quarter 2022 dividend. Simon Property Group currently carries a Zacks Rank #3 (Hold). Over the past month, the Zacks Consensus Estimate for 2022 FFO per share witnessed marginal upward revision to $11.68, reflecting analysts’ bullish outlook. The stock has appreciated 34.5% so far in the quarter. Kimco Realty Corporation: Jericho, NY-based Kimco Realty is a leading publicly traded owner and operator of open-air, grocery-anchored shopping centers and mixed-use assets in the United States. Kimco is well-poised to benefit from its properties, which are predominantly grocery-anchored, and in the drivable first-ring suburbs of its top major metropolitan Sunbelt and coastal markets, having several growth levers. Its focus on last-mile assets, capital-recycling efforts and a strong balance-sheet position act as tailwinds. Currently, Kimco carries a Zacks Rank #3. The Zacks Consensus Estimate for this year’s FFO per share has been revised marginally upward to $1.58 over the past month, indicating a year-on-year improvement of 14.5%. The stock has appreciated 23.4% so far in the quarter. Tanger Factory Outlet Centers, Inc.: This Greensboro, NC-based retail REIT is a well-known operator of upscale, open-air outlet centers. SKT owns or has an ownership interest in, and manages a portfolio of 37 centers, with an additional center presently under development. With more than 41 years of experience in the outlet industry and a well-located portfolio, Tanger is poised to benefit from the upbeat retail environment in this holiday shopping season.
Its strategic efforts, leasing acceleration operation revamp are aiding in NOI growth, rent spreads, longer lease terms and higher occupancy. With its open-air shopping destinations grabbing digitally native brands, iconic food and beverage, and entertainment uses, SKT is poised for growth in the upcoming period.
Currently, SKT carries a Zacks Rank #2 (Buy) and has a long-term growth rate of 8.90%, which is ahead of the industry average of 6.2%. Moreover, for 2022, the stock has seen the Zacks Consensus Estimate for FFO per share being revised 1.7% upward to $1.8 over the past month. This also suggests an increase of 2.3% year over year. This upward trend in estimate revisions is also visible for 2023. The stock has also gained 42.7% quarter to date.
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.