Retail REITs Continue To Provide Measurable Consistency And Durability

Includes: FRT, KIM, O, ROIC, SKT, TCO, WRI
by: Brad Thomas

According to NAREIT, the retail sector is the second best performing sector for all REITs this year. The performance in the broader 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 23.3 percent, compared with 16.09 percent for the FTSE NAREIT All Equity REIT Index and 14.47 percent for the S&P 500.

The retail sector is recovering nicely and for the first time since the recovery began, we are seeing small shop occupancies grow. In addition, the national retailers are pursuing expansion and many of the value oriented retailers and discounters are opening new stores. With virtually no new construction during the recession, the retailers are out building stores and looking for quality locations.

As a result of the supply and demand imbalance, the retail sector is seeing considerable growth as evidenced by the most recent REIT total returns. With an average dividend yield of 3.21 percent, the retail REIT sector is reporting strong growth in capital with total returns (as of September 28, 2012) of 23.2 percent.

The retail sub-sectors have also reported exceptional growth as evidenced by the shopping centers (24.65 percent total return), regional malls (22.90 percent total returns), and free-standing sector (20.90 percent total return).

Retail REITs account for around 26 percent of the total equity REIT market capitalization, and the retail sub-sectors are made up of $83.63 billion of regional mall REITs, $41.5 billion of shopping centers, and $11.5 billion of free-standing REITs.

Recent Results for 7 Retail REITs

Federal Realty Investment Trust (NYSE:FRT) reported FFO growth for the third quarter, as same-property operating income jumped 10.3 percent. The company reported third-quarter FFO of $72.1 million, or $1.12 per share, compared to $63.9 million, or $1.01 per share, in the 2011 third quarter.

Same-property operating income grew by 10.3 percent and the overall portfolio was 95.1 percent leased at the close of the quarter. Federal Realty signed 109 leases for 531,573 square feet of retail space during the quarter, and it filled 504,082 square feet of space that had been previously leased at an 11 percent increase in per-square-foot rents.

Weingarten Realty Investors (NYSE:WRI) reported third-quarter FFO of $55.1 million, or 45 cents per share, compared to $30.7 million, or 25 cents per share, earned a year earlier. Recurring FFO for the quarter came to $56.2 million, or 46 cents per share, compared to $56.2 million, or 47 cents per share, a year ago.

Weingarten raised the lower end of its full-year 2012 recurring FFO guidance range, forecasting $1.80 to $1.84 per share, compared to its prior range of between $1.78 and $1.84 per share. The company issued recurring FFO-per-share guidance for 2013 of $1.84 to $1.90.

For the third-quarter, same property NOI increased 4.9 percent over the same quarter of the prior year. Occupancy of the company's retail portfolio increased to 93.9 percent from 92.8 percent a year ago. During the three-month period, Weingarten sold 10 retail assets for $66 million and continued the divestiture of its industrial assets by selling nine properties for $23 million from one of its remaining joint ventures. The company expects to sell its interest in its other industrial joint venture by year-end. Year-to-date, dispositions totaled $565 million.

Kimco Realty Corp. (NYSE:KIM) FFO totaled $119.0 million, or 29 cents per share, compared to $134.3 million, or 33 cents per share, in the prior-year period. The company attributed the decrease in FFO to $8.3 million in transactional expenses incurred mainly from a $6.2 million noncash charge in connection with the redemption of the company's $175 million, 6.65 percent class F cumulative redeemable preferred stock, compared to $10.6 million of transactional income earned in the 2011 period, primarily from the monetization of several nonretail investments.

FFO as adjusted clocked in at $127.3 million, or 31 cents per share, versus $123.7 million, or 30 cents per share, a year previously. Kimco also increased its quarterly dividend by 10.5 percent to 21 cents per share, payable Jan. 15, 2013, to shareholders of record Jan. 2, 2013.

Kimco maintained its full-year 2012 FFO as adjusted guidance of $1.24 per share to $1.26 per share, issued in July with the company's second-quarter results. The company also issued 2013 full-year guidance, calling for FFO as adjusted to come in between $1.28 per share and $1.33 per share.

Taubman Centers Inc. (NYSE:TCO) posted a 25.4 percent year-over-year FFO-per-share gain in the third quarter and increased its full-year FFO-per-share estimate. FFO attributable to the company totaled $49.1 million in the quarter, or 79 cents per share, versus $37.7 million, or 63 cents per share, in the third quarter of 2011.

Adjusted FFO attributable to the company totaled $53.5 million, or 86 cents per common share, versus $38.9 million, or 65 cents per common share, in the prior-year period. Average rent per square foot in the quarter was $46.85, up 3.5 percent from $45.28 in the third quarter of 2011. NOI excluding lease cancellation income grew 7.4 percent during the quarter.

As I wrote in a recent article (Taubman REIT's Asia Growth Forges Ahead) on The Street, Taubman is expanding its trademark luxury brand in Asia with "a strategic focus on diversification; however, the company has spent a few years studying the trade area" and, as explained (on the recent earnings call) by CEO, Bobby Taubman, the growth will be moderately executed:

In Asia, we now have a platform and good strategic partners. However, we believe it's important to walk before we run. We're very focused on execution. We're not the lead in these initial projects; however, we always make sure that we have control over design and leasing. This is a marathon, it is not a sprint.

Leased space in comparable centers for Taubman's portfolio was 92.4 percent on Sept. 30, up 1 percentage point from 91.4 percent on Sept. 30, 2011. Ending occupancy in comparable centers was 90.4 percent on Sept. 30, up 1.9 percentage points from 88.5 percent on Sept. 30, 2011.

Tanger Factory Outlet Centers Inc. (NYSE:SKT) reported third-quarter FFO available to common shareholders totaling $41.9 million, or 42 cents per share, compared to $37.9 million, or 39 cents per share, in the year-ago quarter, up 10.6 percent on an aggregate basis. The company's third-quarter AFFO increased year over year to $41.9 million, or 42 cents per share, from $38.9 million, or 40 cents per share.

This year-over-year increase is a direct result of Tanger's ability to continue to drive rental rates in gross same-center NOI as well as the accretive impact of the acquisitions made during 2011. On a consolidated basis, Tanger's total market capitalization at September 30, 2012 was approximately $4.2 billion, up from $3.5 billion last year.

Tanger's debt-to-total market capitalization was approximately 24.8 percent at September 30, 2012 compared to 27.8 percent last year. The company also maintained a very strong interest coverage ratio of 4.37 times for the quarter, up from 4.11 times for the third quarter of 2011. As of September 30, 2012, approximately 63.3 percent of Tanger's debt was at fixed rates. Tanger's balance sheet strategy continues to be conservative targeting minimal use of secured financing and a manageable schedule of debt maturities (no significant maturities on our balance sheet before November of 2015).

Tanger's FFO payout ratio for the first nine months of 2012 was approximately 53 percent and at these levels, Tanger will be able to generate significant incremental cash flow over its dividend.

Realty Income Corp. (NYSE:O) reported third-quarter FFO available to common stockholders of $63.4 million, or 48 cents per share, compared to $63.6 million, or 50 cents per share, in the prior-year period, representing decreases of 0.3% and 4.0% on an aggregate basis and a per-share basis, respectively.

Third-quarter AFFO totaled $68.5 million, or 52 cents per share, compared to $64.2 million, or 51 cents per share, in the prior-year period, representing increases of 6.7% on an aggregate basis and 2.0% on a per-share basis.

The company also reaffirmed its AFFO estimate for the year at $2.06 to $2.11 per share. For 2013, the company currently expects FFO per share to range between $2.30 and $2.36 and AFFO to range between $2.31 and $2.37 per share. At Sept. 30, portfolio occupancy was 97.0 percent.

During the third quarter, Realty Income invested $496.1 million in 87 new properties and properties under development. The properties are located in 19 states and are 100% leased. Realty Income issued 14,085 common shares during the quarter via its stock plan at an average price of $41.69 per share, generating gross proceeds of $584,000.

Retail Opportunity Investments Corp. (NASDAQ:ROIC) adjusted its full-year FFO guidance and detailed a number of property transactions while reporting its third-quarter results. The company said it now expects FFO for 2012 to come in between 70 cents per share and 75 cents per share, narrowed from the company's August guidance affirmation of between 68 cents per share and 78 cents per share.

The guidance takes into account anticipated costs associated with the relocation of its corporate headquarters to San Diego, which totaled $1.0 million in the third quarter and is estimated to cost an additional $2.0 million to $2.3 million in the fourth quarter.

Retail Opportunity Investments also noted several transactions in its quarterly report, including the acquisition of Bay Plaza Shopping Center in San Diego for $21.6 million. The 73,000-square-foot shopping center is 88 percent leased and is anchored by Seafood City Supermarket. The company has signed a binding contract to acquire a 38,000-square-foot shopping center in Rancho Bernardo, Calif., for $12.4 million. The 100 percent-leased property, called Bernardo Heights Plaza, is anchored by Sprouts Supermarket.

Retail Opportunity Investments also plans to acquire Manhattan Village Shopping Center, a 63,000-square-foot property in Normandy Park, Wash., for $14.0 million. The property is 95 percent leased and is anchored by Kroger's QFC Supermarket. Finally, the company has a binding contract to purchase a San Jose, Calif., property called Santa Teresa Village Shopping Center for $31.6 million. The 91.1 percent-leased shopping center totals 124,000 square feet and is anchored by Nob Hill Foods, a regional grocery store.

Retail REITs Providing Measurable Consistency and Durability

So based upon the latest retail REIT earnings, it is clear that retail leasing demand is recovering to a level that the retail REITs are seeing improvement in occupancy, leasing spreads, and renewals. With very limited new supply, the high-quality retail 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.

So 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.

Many of the "best in class" retail REITs are continuing to provide consistency in profits - in good times and bad. For investors, the essence of the recovery has been the remarkable risk control fundamentals that Ben Graham described (in The Intelligent Investor),

It is the consistency in the products that creates consistency in a company's profits. Consistency and durability are attributes for competitive advantage.

Source: SNL Financial, NAREIT

Disclosure: I 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.