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Zacks Industry Outlook Highlights Acadia Realty and Saul Centers

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For Immediate Release

Chicago, IL – June 2, 2023 – Today, Zacks Equity Research discusses Acadia Realty Trust (AKR - Free Report) and Saul Centers (BFS - Free Report) .

Industry: REIT


The 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 omnichannel retailing, adaptive reuse capabilities and opportunities emanating from consolidations and a focus on e-commerce resistant sectors have poised Acadia Realty Trust and Saul Centers well for growth.

However, the economic slowdown might cast a pall on recovery. High borrowing costs and labor market pessimism are likely to weigh 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 estate. 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. Although the 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 In-Store Shopping Enthusiasm, Limited Supply Aid Fundamentals: The retail real estate industry is set to benefit from the renewed enthusiasm of shoppers seeking exclusive in-store shopping experiences after the pandemic. Physical retail locations offer long-term profitability and customer acquisition benefits, leading retailers to shift their focus from store closures to growth plans. This shift results in the increased demand for physical store spaces, driving the success of retail REITs through improved leasing activity and pricing power.

Retailers are also investing in their stores as these serve as showrooms and convenient locations for pick-up or exchanges, helping offset the rising costs of last-mile delivery. However, the construction of new retail space remains sluggish due to high costs. Additionally, struggling malls and centers have been transformed into mixed-use developments, reducing the available retail space. This limited supply of retail space is expected to support the fundamentals of the retail real estate industry, even in the face of a challenging economic backdrop and its impact on retail demand.

Omnichannel Strategy, Structural Changes, Consumer Essentials in Focus: Omnichannel strategies have become the central focus for retailers, and the rapid growth of e-commerce, which previously disrupted the retail commercial real estate sector, is now an integral part of retailers' sales strategies. This integration has significantly reduced the threat to physical store demand.

Physical stores remain a crucial sales channel in the long run as online shopping, while convenient, cannot replace the benefits and satisfaction of visiting a brick-and-mortar store. Recent foot traffic trends demonstrate consumer preference for researching products online but completing purchases or picking up items in-store. Thus, click-and-collect sales are expected to gain momentum.

Digitally-native brands are also increasing their physical presence to enhance customer connections and drive expansion as part of their omnichannel strategies. Retailers now prioritize not only expanding their online presence but also maintaining brick-and-mortar stores in prime locations, providing optimism for retail REITs focused on these locations.

Moreover, retailers specializing in essential consumer goods, such as discounts, superstores, groceries and medical supplies, are expected to attract consistent foot traffic and generate sales at their shopping centers and capture a larger market share. As the impact of the pandemic diminishes, the revival of entertainment and dining concepts boosts growth opportunities for retail REITs.

High Rates, Economic Slowdown to Make It Challenging: The recovery of the retail real estate market is likely to be hindered by high-interest rates and an economic slowdown. While inflation is showing signs of moderation, it remains a concern as it influences consumer behavior toward more cautious spending. A slowdown in the job market and a potential impact on wage growth will exacerbate the situation, leading consumers to rely more on savings and credit for their purchases.

With economic uncertainty, diminishing savings, high borrowing costs and layoffs in certain sectors, the demand for retailers' goods is expected to decline. Consequently, the demand for retail real estate space in the near term is likely to be tempered. Additionally, retailers will continue to face challenges with higher material and operating costs, impacting the demand for retail space and landlords' cash flows.

Furthermore, the heavy reliance of REITs on debt for their business makes investors apprehensive about their performance in a high-interest-rate environment. As REITs are often viewed as bond substitutes due to their consistent and high dividend payouts, these are susceptible to the effects of high rates.

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 #100, which places it in the top 40% 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 outperform 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.

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 Surpasses the Sector but Lags the S&P 500

The REIT and Equity Trust - Retail Industry has outperformed the broader Zacks Finance sector over the past year but underperformed the S&P 500 composite.

The industry has declined 7% during this period against the S&P 500’s increase of 2.9%. Meanwhile, the broader Finance sector has declined 7.1%.

Industry's Current Valuation

On the basis of forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, we see that the industry is currently trading at 13.44X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 18.75X. The industry is trading above the Finance sector’s forward 12-month P/E of 12.94X.

Over the last five years, the industry has traded as high as 18.61X and as low as 10.28X, with a median of 15.24X.

2 Retail REIT Stocks to Buy

Acadia Realty Trust: This Rye, NY-based retail REIT is engaged in the operation, management, leasing, revamp and acquisition of shopping centers and mixed-use properties with retail constituents.

AKR is well-positioned for internal growth, with a focus on lease-up activities, contractual rent escalations, and the rebounding of market rents. Furthermore, the successful execution of the value-add business plan on recently acquired properties is expected to yield long-term profitability.

Acadia Realty Trust holds a Zacks Rank of 2 (Buy) at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised marginally upward over the past month to $1.23. The FFO per share figure for 2023 also indicates a projected increase of 3.4% year over year. The stock has declined 2.3% over the past month.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Saul Centers: This Bethesda, MD-headquartered retail REIT is presently engaged in the operation and management of a real estate portfolio of 61 properties. The portfolio comprised 50 community and neighborhood shopping centers and seven mixed-use properties with roughly 9.8 million square feet of leasable area, and four land and development properties.

Saul Centers generates more than 85% of its property operating income from properties in the metropolitan Washington, DC/Baltimore area. Workforce trends, urbanization and the aftermath of the pandemic are reshaping tenant preferences, changing the way people work, live, play and shop, and Saul Centers, through its neighborhood shopping centers and mixed-use properties, remains well-poised to leverage favorable trends.

Saul Centers currently carries a Zacks Rank #2. Over the past month, the Zacks Consensus Estimate for 2023 FFO per share has witnessed a 1.3% upward revision to $3.05, reflecting analysts’ bullish outlook. The stock has declined 1.4% over the past month.

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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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit for information about the performance numbers displayed in this press release.

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