Retail REITs - Reflecting A Worst-Case Scenario

Includes: CDR, DDR, KIM, RPT, XRT
by: Rubicon Associates


The downturn in retail has been severe. Slower growth and policy proposals are helping to drive it down.

There is one sector that has been overdone.

I will provide a high-level view of the industry.

We have all seen the news on the various retailers, which reflects the following:

  • Amazon (NASDAQ:AMZN) - the Goliath that slays all comers;
  • Border Adjustment Tax - the proposed tax on imported goods which will (according to some) affect the purchasing power of consumers, and hence, consumer spending;
  • Slowing sales and compressed margins;
  • A move from bricks to clicks;
  • Fickle consumers shifting faster than retailers can adapt

... and so on and so on and so on.

The effect has been dizzying and severe, with many retailers struggling to stay open and others just closing down.

The result:

Chart SHLD data by YCharts

The risks mentioned above will have an impact on corporate profitability, but will it force widespread lease cancellations and a significant increase in vacancies?

I don't think it will, and yet, look at the following chart:

Chart RPT data by YCharts

On a year-to-date basis, the owners of the real estate assets have underperformed their tenants and the SPDR S&P Retail ETF (NYSEARCA:XRT). I believe this has created an opportunity for investors, or will in the near term.

I am specifically referring to the shopping center REITs as shown in the following table:

The available yields:

Returns in the space have been varied, but the sector as a whole has underperformed the broader REIT index.

Here's the 1-year total return graphically:

As a result, a large number of shopping center REITs are trading at or near their 52-week lows:

The distance from the highs is shown graphically below:

And the distance from the lows:

In the following charts, I have taken a sample of the retail REITs and compared their price to that of XRT. Specifically, I am sampling:

  1. Kimco Realty Corp. (NYSE:KIM)
  2. Cedar Realty Trust (NYSE:CDR)
  3. DDR Corp. (NYSE:DDR)
  4. Ramco Gershenson Properties Trust (NYSE:RPT)

I chose these REIT randomly - with the exception of KIMCO, which I have followed since Milton Cooper was in charge.

All of the charts above show that the shopping center REITs have underperformed the retailers ETF.

Further, as the following chart indicates, the shopping center REITs are trading at lower multiples than they have in over a year:

Importantly, the shopping center REITs pay a higher dividend:

Chart KIM Dividend Yield (TTM) data by YChartsChart RPT Dividend Yield (TTM) data by YCharts

What I find interesting is that the majority of the "retail hardship" is being felt at the mall level, not the grocery/power center-anchored shopping center level. And yet, the following chart would lead one to the opposite conclusion.

Chart SPG data by YCharts

Finally, a look at the universe of equity REITs and where shopping centers fits in:

My universe groups malls and shopping centers, but if the malls were stripped out (removing CBL & Associates Properties (NYSE:CBL) and Pennsylvania Real Estate Investment Trust (NYSE:PEI) and their very low multiples), the shopping center sector trades at a P/eFFO of 15.4 (as shown in an earlier table).

From a higher-level view, it appears that the shopping center REITs have been overly punished and are worthy of a look. Over the coming days, I will be looking at some of the participants in this sector in order to determine if the market's view is consistent with the individual REIT environment and profile.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.