I am a huge fan of retail properties. Many of you may be wondering why, considering that retailers can be high risk investments. While this is a logical thought, its not necessarily true. In fact, the long-term leases coupled with a strong credit rating can be a huge win. In addition to this, if the property is in a strong location with a dense population, it's very likely that occupancy and the chances of tenants renewing their leases will be high.
So what are the typical returns like in retail strip centers?
CBRE February 2013 Cap Rate Survey
As you can see the average cap rate in the higher end is about 7% for Class A properties. As much as we would like to own a strip mall, most of us don't have the financial capacity to do so.
Let's take a look at some of the large retail REITs.
Here are there current dividend yields:
|Simon Property Group||2.80%|
|General Growth Properties||2.20%|
Ok, so clearly the yields on the major retail REITs are light, but I am sure many investors are hoping for price appreciation as well future dividend growth. While dividend growth is likely for these companies, I don't believe they will achieve a yield that can resemble a reasonable cap rate for awhile. So what other options are there? Does this mean you should just give up?
No not necessarily. Let's take a look at Retail Properties of America (RPAI). Retail Properties is a retail REIT as well, but is much smaller than the above four that I listed. RPAI's market cap is about $3.3 billion.
RPAI manages and owns more than 39 million square feet on retail space nationally. They have some fantastic class A properties in great locations.
Below are just two examples:
Fullerton Metrocenter (Fullerton, CA)
The Fullerton Metrocenter contains several retailers from Target to H&R Block.
Boulevard at Capital Centre (Largo, MD)
This shopping center contains businesses such as Gold's Gym, Five Guys, Coldstone Creamery, and various others.
These are just two properties, but it should help give you a good idea of what type of assets RPAI owns and manages. So now let's move on to the actual investment. As I mentioned earlier, cap rates on the higher end for retail are generally around 7%.
Many of you may already be saying that RPAI has a 4.5% yield, so where am I getting 7% from. Well that's because I am not referring to the common, but rather the preferred.
RPAI issued its series A preferred last December. The preferred has a yield of 7% at par value. However, the preferred is actually trading under par and the yield on cost is more like 7.2%.
Now if you are an investor that is looking for price appreciation, then this article is likely not going to be for you.
I have been searching to invest in hard assets like real estate, but could not find the right opportunities. Either that or the good properties were just way too pricey. So I began to see if the public markets could offer me a bite sized opportunity where I can get a similar return to owning a physical asset. Based on the yields of the top four retail REITs I mentioned, it was clear I wasn't having much luck.
I then began to realize that while common does allow for price appreciation, I would be happy to own a preferred as long as the underlying assets were tied to real estate. So I finally came across RPAI's series A preferred. However, it didn't really begin to catch my eye until it started trading under par. I believe the yield on cost of 7.2% is fantastic.
For those of you wannabe real estate investors like myself, think about it like owning the actual real estate without the hassle of actually owning the real estate. The other plus to the preferred is that it is cumulative so it actually has seniority over the common. In order for the preferred dividend to be cut, the common dividend has to be eliminated. If this were to happen, common shareholders would not receive a dividend until the preferred holders get all accrued dividend payments they are owed. Pretty sweet, huh?
In conclusion, the series A preferred is a great investment for everyday retail investors (no pun intended). While you won't get price appreciation, this security is more for investors looking for a stable income stream. Just like physical real estate, there are investors that want price appreciation and some that just want to hold for a very long time. I believe a yield of 2-3 times that of major REITs more than makes up for the lack of price appreciation.
One last note, the preferred can be called anytime after 12/2017. However, given that the preferred is trading under par, investors would actually profit in this scenario since it has to be called at $25.
The security has different symbols depending on your brokers. Here are some examples: RPAI-A, RPAI-PA, RPAI PRA, etc. Please check with your brokers regarding this.
Additional disclosure: I am long RPAI series A.