Zacks REIT and Equity Trust - Retail industry constituents are expected to bear the brunt of inflationary pressure and economic slowdown. Rising borrowing costs and labor market pessimism are likely to weigh down on consumers’ willingness to spend. Also, higher e-commerce adoption might continue to affect retail landlords’ cash flows. Nevertheless, the renewed enthusiasm of shoppers for an exclusive in-store shopping experience following the pandemic downtime amid limited new supply is likely to help industry fundamentals. 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) , Federal Realty Investment Trust ( FRT Quick Quote FRT - Free Report) and National Retail Properties, Inc. ( NNN Quick Quote NNN - Free Report) well for growth. 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 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. Dwindling footfall, store closures and retailer bankruptcies bothered this asset category in the past. However, shoppers’ renewed enthusiasm for in-person shopping has helped the industry tide over.
What's Shaping the Future of the REIT and Equity Trust - Retail Industry?
Inflationary Pressure, Rate Hike, Economic Slowdown to Make It Challenging: The retail real estate market is likely to remain challenging in the near term, given the inflationary pressure, higher interest rates and economic slowdown. Particularly, though inflation is moderating, it is still a concern as it is leading to the adoption of a more cautious spending attitude by consumers. Also, a slowdown in the job market and any potential impact on wage growth is likely to aggravate the woes, making shoppers more dependent on their savings and credit for purchases. Amid the uncertainty in the economic backdrop, the depletion of savings, the rising borrowing costs and the labor market pessimism, demand for retailers’ goods is likely to dwindle. This, in turn, would temper the demand for the retail real estate space in the near term. Moreover, with a shortage of labors, staffing of stores is likely to become challenging for retailers. Higher material and operating costs may remain as retailers’ woes. These issues, in turn, are expected to moderate the demand for retail space as well as cast a pall on landlords’ cash flows. Moreover, the dependence of REITs on debt for business is more compared to the other industries, making investors skeptical about their performance in a rising rate environment. Also, as the investment world treats REITs as bond substitutes for their high and consistent dividend-paying nature, these companies are susceptible to rising rates. 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. 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. In fact, consumers these days prefer to research products online but buy or pick up in stores. Amid this, click-and-collect sales are likely to gain momentum. 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. Therefore, 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. Renewed Enthusiasm for In-Store Shopping Experience Amid Limited Supply to Aid Fundamentals: 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. However, comparing to the pre-pandemic levels, the construction of new retail space remains dreary amid high construction costs. Also, with struggling malls and centers’ landlords opting for mixed-use developments over the past years, a sizeable part of retail space has been removed from the market. This limited supply is likely to support the retail real estate industry fundamentals even amidst the challenging economic backdrop and its corresponding impact on retail demand. Zacks Industry Rank Indicates Bleak Prospects
The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks
Finance sector. It carries a Zacks Industry Rank #169, which places it in the bottom 33% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of the negative 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 losing confidence in this group’s growth potential. Over the past year, the industry’s FFO per share estimates for 2022 have declined 2.0%. The same for 2023 has moved 9.7% south over the past year. 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 both the S&P 500 composite as well as the broader Zacks Finance sector in a year’s time.
The industry has declined 1.2% during this period compared with the S&P 500’s fall of 8.7%. Meanwhile, the broader Finance sector has declined 7.8%. 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 15.04X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.46X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.31X. 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 18.54X, as low as 10.32X, with a median of 15.28X.
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. Its better-than-expected fourth-quarter 2022 results reflected a healthy operating performance and growth in occupancy levels. Moreover, with solid balance-sheet strength and available capital resources, Simon Property Group looks poised to well navigate the challenges and bank on opportunities emanating from market dislocations. Simon Property Group currently carries a Zacks Rank #3 (Hold). SPG has a long-term growth rate of 3.50%. The Zacks Consensus Estimate for 2023 FFO per share is currently pegged at $12.02, suggesting 1.3% growth year over year. The stock has appreciated 5.8% in the past three months. Federal Realty Investment Trust: This North Bethesda, MD-based retail REIT boasts a portfolio of premium retail assets — mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles — along with a diverse tenant base, both national and local, which positions it well for decent growth. Federal Realty has strategically selected the first ring suburbs of nine major metropolitan markets. Due to the strong demographics and infill nature of its properties, the company has been able to maintain a high occupancy level over the years. Federal Realty has expertise in raising its operating performance through conversion, redevelopment and repurposing of assets. Its focus on essential retail and mixed-use assets bodes well for long-term growth. Federal Realty’s better-than-anticipated fourth-quarter 2022 results reflected healthy leasing activity and higher-than-expected revenues. This retail REIT provided an upbeat outlook for 2023, with FFO per share projection exceeding the consensus mark. Federal Realty also experienced strong small-shop leasing, ending the quarter at 90.0%. This marked an uptick of 260 bps year over year and the highest small-shop leased rate since the first quarter of 2017. Currently, FRT carries a Zacks Rank #3 and has a long-term growth rate of 6.60%. Moreover, for 2023, the stock has seen the Zacks Consensus Estimate for FFO per share being revised four cents upward to $6.38 over the past week. The stock has also gained 4.2% over the past three months. National Retail Properties, Inc.: This Orlando, FL-based retail REIT invests in high-grade retail properties subject usually to long-term net leases. NNN’s portfolio comprised 3,411 owned properties in 48 states with a gross leasable area of roughly 35.0 million square feet and with a weighted average remaining lease term of 10.4 years as of Dec 31, 2022. National Retail Properties’ high-quality, diversified portfolio helps it to enjoy high occupancy. Also, long-term, net leases add stability to operating results, with tenants being responsible for operating expenses, taxes and capital expenditures. National Retail Properties’ better-than-anticipated fourth-quarter 2022 results reflected higher-than-expected revenues. Moreover, its record-level property acquisitions in 2022, strong balance sheet position and steady free cash flow positions the company well to navigate any macroeconomic challenges in the current year. Currently, NNN carries a Zacks Rank #2 (Buy) and has a long-term growth rate of 3.90%. Moreover, for 2023, the stock has seen the Zacks Consensus Estimate for FFO per share being revised marginally upward to $3.26 over the past week. This also suggests an increase of 1.56% year over year. The stock has also gained 4.7% in the past three months.
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.