Retail Figures Slump: How Will This Affect Retail REITs?

I love it when the data proves I was right. Call me egotistical. Call me arrogant. Just do not call me wrong.

Just a few days ago, I wrote about how the housing slowdown has reached its lowest point. I told readers that some real-estate investment trusts (REITs) look downright promising. I also warned that others were in extremely dangerous territories.

Wednesday's consumer spending figures proved my theory was right on track. The report showed that while consumer spending dropped 1.2%, healthcare spending was up by a similar amount.

In other words, REITs that specialize in healthcare properties, like National Health Investors (NHI), will beat the markets. And their counterparts that focus on retail-related properties, like Simon Property Group (SPG), are going to under-perform.

Going out of business sale

Mall owners saw their share prices get slashed Wednesday. As a whole, retail-based REITs dropped over 14%, while the rest of the markets dropped by just 8%. Stocks with those kinds correlations to consumer spending are not the kind of stocks you want to be investing in during a recession.

The pain is only going to get worse for REITs like Simon Property. Right now, out of the more than 380 malls the company owns, 91.8% of them are occupied. This time last year, that figure was only slightly higher, reading at 92% occupancy. Only a few less stores are rented now than last year.

Those two figures should scream to potential investors that the worse is yet to come. Because store closures significantly lag behind dwindling retail stores, we are going to see occupancy rates drop for several more quarters, if not years, to come.

Going belly-up

Companies like Circuit City (CC) and Linens 'n Things are in serious trouble. The electronics retailer is within grasp of bankruptcy. And the home furnishings chain is closing its door for good, with some stores shutting down as soon as today.

It is the same picture all over the industry. Mall occupancy rates will soon start to plummet.

Needless to say, the retail REIT sector is in serious trouble. As a value investor, it may be tempting to grab these stocks at current prices (they have fallen more than 40%) thinking they have reached their bottom. Do not do it. It is a trap.

The retail industry's woes have just begun. The problems will get much worse before they even think of getting better.

If you are looking to play the real estate industry and take advantage of its sizeable dividends, look at the healthcare industry and its lucrative REITs. There are only two sectors of consumer spending that are actually expanding. Take advantage of them.

Stock position: None.

Comments

[Laughing Lo...:]

Clearly Andrew you are not very educated on Retail REITS. Such is evident from your statement that "Right now, out of the more than 380 malls the company owns, 91.8% of them are occupied." This is not at all what that statistic means. Perhaps you should do a little more homework and a little less patting yourself on the back. Also making comparisons between Simon Property Group and General Growth further showcase your lack of Retail knowledge. General Growth is in significant financial trouble due to their highly leveraged portfolio. Simon on the other hand is cash healthy and has very low debt. Again, sharpen your pencil and tell us the real facts.

2008 Oct 17 09:27 AM

[Barrels:]

A REIT also is as good as it's properties. I like UBP. Fairfield County CT and Westchester County NY are understored and incomes are high even in this recession.

2008 Oct 17 05:12 PM