Young woman holding sale shopping bags. consumerism lifestyle concept in the shopping mall
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This year, the timing of ICSC RECon – the biggest annual gathering of retail real estate professionals in the world – puts it right in the middle of a somewhat tumultuous time in the retail industry, still.
RECon kicked off on Sunday, just a few days after Macy’s and Walmart both reported quarterly earnings , setting the stage for other companies like Target, Kohl’s, Foot Locker, Victoria’s Secret-owner L Brands and J.C. Penney, among others, to report this week.
While Macy’s and Walmart both delivered largely upbeat results, we know there are still a lot of companies struggling to grow sales – or are still trying to figure out how many more stores they need to close. And for Macy’s and Walmart, online sales continue to grow much more rapidly than their businesses as a whole. If all they had was bricks-and-mortar, they would be in far worse shape.
Commercial real estate landlords should have their eyes peeled on retail earnings this week to check in on the health of their tenants, whether that’s Home Depot or Urban Outfitters.
At the show this year, there’s sure to still be talk about what companies are closing stores, and what the landlords are then doing to fill those gaps. (Last year, remember everyone was talking about Sears.) But there also will be more conversations at RECon this year around the blurring between shopping in stores and shopping online. As more retailers are creating true “omnichannel” experiences, landlords need to figure out what that then means for their businesses, and how they can work around that.
Another big topic of discussion right now for retailers – which landlords should be paying attention to – are tariffs.
The White House has threatened to impose 25% tariffs on roughly $300 billion of Chinese goods – that’s beyond what’s already gone into effect as recent as last week. This newer list of goods under consideration includes apparel and footwear – which would really hit the retail industry, if those tariffs come to fruition. And that would then hit shoppers, because retailers would likely be forced to raise prices on things like clothing, to try to reduce some of the added cost pressures from their importing.
The tariffs could steer shoppers to budget more, and tighten their wallets, right ahead of this holiday season. And that could spell bad news for all the shopping districts and malls across the country that lose any business. A study by Trade Partnership said the tariffs could cost an average family of four in the U.S. $767 per year.
While nothing is firm yet – any many companies including Walmart and Macy’s have said they are already working on the tariffs issue to try to mitigate as much risk as possible – it’s something everyone in the industry should be paying attention to.
I anticipate this is something else folks are talking about at RECon this week, in addition to the flurry of pop-up shops, food halls and entertainment complexes we see moving into what used to be space reserved just for clothing companies. That’s just how the industry is evolving.
Now, with all of these companies at RECon this week, I want to tell you which real estate investment trusts are some of the best in the sector, and why.
3 Retail REITs That Are Poised To Profit
Simon Property Group (SPG) is a leading mall REIT that owns full or partial interests in 234 properties totaling 191 million square feet of retail space across North America, Europe, and Asia. The REIT’s US malls alone generated $60 billion in sales in 2018.
Simon is one of the largest retail landlords on the globe which means that it has tremendous scale advantage. While meeting with tenants at ReCon this week, the malle REIT can flex muscle in hopes of negotiating the highest rents for many of the most prestigious retail addresses in the world.
However, one key differentiator for Simon is the company’s cost of capital advantage – the balance sheet is a fortress – with over $7.5 billion of liquidity. That’s enough to pay for its entire development backlog and shadow backlog that includes existing properties, densification, and mixed-use properties.
While many of Simon’s peers struggle, the gigantic REIT is one of the few that can totally self-fund its growth. That’s a huge plus.
It’s true that Simon’s growth has slowed modestly, from around 8% per year, to around 5% these days. However, the company recently announced a divided increase of around 5.1% and the valuation today makes this blue chip a compelling Strong Buy. Shares now trade at 14.3x P/FFO with a dividend yield of 4.7%, making this a solid pick – regardless of the retail cycle.
Since the IPO around five years ago Brookfield Property Partners (BPY) has grown via several major acquisitions into a leading consolidator of trophy assets. The company has not just tripled in size, but it’s become diversified into 10 different REIT industries, and retail is the largest category (around 42%).
The company formed a related company, Brookfield Property REIT (BPR), as part of the consolidation of the $15 billion General Growth Properties acquisition last year. Because GGP’s shareholders were REIT investors, BPY created BPR (the REIT equivalent) to fit everything in more smoothly.
BPY and BPR are economically the same security, with identical dividends/distributions and the same payout growth rate, but BPR utilizes a 1099 versus a K1 for BPY investors.
Similar to Simon, BPY/BPR have enormous liquidity – over $7 billion – so it also can self-fund its development pipeline. The company is currently working on $1.5 billion in redevelopments that are expected to deliver 6%-8% cash yields and the core office properties have around $4.5 billion in new developments planned through 2025 (with cash yields of around 7%).
This makes BPY/BPR a cash cow that is forecasted to grow earnings by 7% to 9% per year. I like the broad diversification, that supports the bullish sentiment of owning the highest quality retail properties in the most prestigious markets.
Brookfield *BPY/BPR) is also trading at a nice margin of safety, with a P/FFO of 14.3x (vs. a 16.4x REIT average) and dividend yield of 6.5%. Shares have recovered quite a bit year-to-date (+23%) but it appears there’s still room to run, as we maintain a solid BUY rating.
Finally, one of the biggest bargains in the retail sector is Tanger Outlets (SKT), based in Greensboro, NC.
While you may not consider outlets to be as sexy as their closest cousins in the mall sector, you must remember that outlets don’t have department stores, so they aren’t exposed to big-box lease-up and redevelopment risks.
Tanger is the only mall REIT that invests exclusively in outlets, and this provides the company with negotiating power as the properties are all named “Tanger Outlets”.
That provides for name-recognition, loyalty discounts, and technology (apps) that further synergized efforts for outlets to compete as part of the evolving omni-channel process.
Tanger has maintained 95% (or higher) occupancy since listing shares over 25 years ago and remarkable the company has paid and increased dividends every year since it went public.
Although Tanger’s share price has been beaten down hard (-8.7% YTD), the dividend yield is now just under 8% and is well-covered with earnings (Funds from Operations is the REIT earnings equivalent). Further, Tanger has around $100 million of free cash flow (after dividends) so it can paydown debt, buyback stock, or reinvest.
Interesting side, Warren Buffett actually owned Tanger many years ago, and I would not be surprised to see Berkshire Hathaway pounce on Tanger. It checks all of the boxes in the “Grahamian” (Ben Graham) world of investing.
This REIT is one of my highest conviction picks as it meets all of the merits of a deep value pick, based on traditional fundamental analysis.
The common thread for all three of these retail picks is that all of the companies have adequate capital to continue to weather the retail cycle. Eventually, I believe that Mr. Market will recognize these REITs for their discipline, and that means that the dividends appear safe enabling investors to sleep well at night.
I own shares in SPG, BPR, and SKT.