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Retail REITs Struggle on J.C. Penney's Store Closure News

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Shares of retail real estate investment trusts (REITs) took a hit on Feb 24 as J. C. Penney Company, Inc. (JCP - Free Report) declared its plan to shut down around 130–140 stores over the next few months. The decision was triggered by the retailer’s plan to “align the company's brick-and-mortar presence with its omnichannel network” and redirect investments in locations, and efforts with high revenue growth potential.

It is quite normal for retailers to optimize their brick-and-mortar presence over time. However, these optimization efforts and the consequent decision to close stores from a number of reputed retailers like Macy’s Inc. (M - Free Report) , Sears Holdings Corp. and JC Penney, in recent months, have sent jitters in the retail real estate market. In fact, investors have been worried about the adverse effects of store closures on mall traffic, sales as well as cash flow of mall landlords.

As such, shares of CBL & Associates Properties, Inc. (CBL - Free Report) declined 3.86%, GGP Inc. descended 1.53% and Washington Prime Group Inc. (WPG - Free Report) fell 1.17%. In addition, Simon Property Group Inc. (SPG - Free Report) edged down 0.38%, while Kimco Realty Corp. (KIM - Free Report) dipped 0.41%.

Despite upbeat consumer confidence and an improving economy, mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns with online purchases growing by leaps and bounds. These have made retailers reconsider their footprint and eventually opt for store closures in recent times.

Further, retailers unable to cope with competition have been filing bankruptcies. This comes as a pressing concern for retail REITs as this trend has been considerably curtailing demand for the retail real estate space.

In fact, over the past one year, Zacks categorized REIT and Equity Trust – Retail industry underperformed the broader market. REIT and Equity Trust – Retail industry logged in a return of 2.6% over this time frame against 21.7% gain of the S&P 500.

However, mall landlords have decided to go to the mattresses. They made efforts to turn their boring retail hubs into swanky entertainment zones, digitizing their malls and making them distribution hubs. And on top of this, they are also coming to the rescue of distressed retailers – a move that can help them avoid bulk store closures – something that liquidation can lead to. This included Simon Property and GGP coming together for the acquisition of teen clothing retailer – Aeropostale – last year.

Retail REITs have also been adapting to the latest technologies, in a bid to offer attractive services to tenants and mall visitors. However, implementation of such measures requires a decent upfront cost. Hence, this is likely to limit any robust growth in profit margins of the retail REITs, moving ahead.

Currently, J.C. Penney, Simon Property, GGP, Kimco carry a Zacks Rank #3 (Hold); while CBL & Associates and Washington Prime Group has a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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