Seeking Alpha
Dividend growth investing, REITs, newsletter provider, value
Profile| Send Message| ()  

According to NAREIT, the retail sector is the best performing sector for all REITs this year. The performance in the leading retail property sector is directly correlated to the improved occupancy fundamentals of the consumer-driven sector. Year to date the retail REITs have posted average total returns of 21.15 percent, compared with 15.99 percent for office/industrial, 12.71 for health care, and 11.87 percent for self-storage.

(click to enlarge)

The retail sub-sectors have also become notably stronger as rent growth has improved across a variety of store fronts. The leading retail sub-sector performers are the regional malls with year-to-date total returns of 22.71 percent - followed by the shopping centers reporting total returns of 19.26 and the free-standing sub-sector posting 16.73 percent.

According to a recent report by New-York based Reis Inc., occupied retail space rose by a net 2.06 million square feet, the third-largest addition since the slump for neighborhood and community shopping centers began in the first quarter of 2008. The increase in absorption is best explained by Victor Calanog, PhD. and Chief Economist at Reis Inc:

With little new construction in the pipeline, the decline in retail vacancies can now appropriately be called a trend towards recovery. Rent growth has been measured, but at least follows a positive trajectory as well. While the worst may now be over for retail properties, risks remain given the fragile state of the economy as a whole. Still, there is reason to celebrate having moved past what could well be the worst downturn for retail real estate in at least three decades.

Vacancies are falling from at least a 12-year high - first reached in the fourth quarter of 2010 and repeated for most of last year -- as a low level of shopping-center construction limits availability, Reis said. About 572,000 square feet of new space came online in the three months ended June 30, the second- lowest quarterly figure in Reis records dating to 1999.

Shopping-center vacancies dropped for a second consecutive quarter to 10.8 percent, down from 10.9 percent in the previous three months and 11 percent a year earlier, Reis said. Effective rents, or what's paid after any landlord discounts, averaged $16.55 a square foot, up from $16.49 a year earlier.

(click to enlarge)

The Shopping Center REITs

According to NAREIT there are a total of 18 shopping center REITs with a combined market capitalization of $39.613 billion (as of June 29, 2012). The average dividend yield for the sub-sector is 3.63 percent and the year-to-date total return is 19.26 percent. Several of my preferred picks include Kimco Realty (KIM), Federal Realty (FRT), Regency Centers (REG), Weingarten Realty (WRI), Excel Trust (EXL), and Retail Opportunity Investment Trust (ROIC).

(click to enlarge)

The Mall REITs

According to NAREIT there are 8 mall REITs with a combined market capitalization of $82.302 billion (as of June 29, 2012). The average dividend yield for the sub-sector is 2.75 percent and the year-to-date total return is 22.71 percent. Several of my preferred picks include Taubman Centers (TCO), Simon Property Group (SPG), CBL Properties (CBL), and Tanger Factory Outlets (SKT).

(click to enlarge)

The Free-Standing REITs

According to NAREIT there are 5 free-standing REITs with a combined market capitalization of 11.214 billion (as of June 29, 2012). The average dividend yield for the sub-sector is 4.18 percent and the year-to-date total return is 16.73 percent. Several of my preferred picks include Realty Income (O), National Retail Properties (NNN), and American Realty Capital Trust (ARCT). I have also included W.P. Carey (WPC) as the company is converting to a REIT later in the year.

(click to enlarge)

Supply & Demand

So it is clear that retail leasing demand is recovering to a level that the retail REITs are seeing improvement in occupancy, leasing spreads, renewals. With very limited new supply, the high-quality shopping center landlords are benefiting from the absorption trends and improved retention rates. The higher-end mall REITs have especially gained favor as most of these REITs have gained strong pricing power over their tenants and with little new construction, the mall REITs are building powerful moat-like brands.

The average dividend yield for the retail REIT sector is 3.15 percent and these retail REITs are very likely to enhance competitive positioning by strengthening portfolios and managing occupancies and renewals. The retail recovery is in motion and I see continued strength in fundamentals and potential for sustainable dividends and capital growth.

(click to enlarge)

Some data provided from SNL Financial, NAREIT, and Reis, Inc.

Source: Retail REITs: Getting Back On Track And Leading The Pack