By now it’s pretty clear to most investors that brick-and-mortar retail didn’t have the happiest of holidays and that’s got to have retail REITs more than a little nervous.
Sure, online retailers had a bonanza led by Amazon.com, Inc. (NASDAQ:AMZN) who had its best holiday ever, and there were pockets of strength with some omnichannel retailers actually executing on their business plans during the most important two months on the shopping calendar.
However, there were some real stinkers reporting sales for December, including several department stores.
“Net results are mixed with a few winners and a few losers,” said Stifel Nicolaus & Co retail analyst Richard Jaffe in a recent conference call. “Longer term into 2017, there are probably four to six bankruptcies that will be announced.”
If Jaffe’s prediction comes to fruition there’s going to be a lot of retail space going empty in a hurry and that’s definitely going to weigh on retail REIT revenues in 2017 and beyond.
So, how do investors play this? Do they simply stay away from retail REITs completely or cherry pick the one or two that are positioned to weather the retail storm?
It’s a fair question; one that I’ll answer below.
Retail REIT to Buy No.1: Tanger Factory Outlet Centers Inc. (SKT)
Dividend Yield: 3.6%
If there is a bright spot when it comes to brick-and-mortar retail, it would have to be outlet stores, which have singlehandedly saved many retailers from closing up shop.
Let’s face it, America has become a discount culture where price is everything.
“Off-price shoppers account for 75 percent of apparel purchases across all channels, and some traditional retailers now have more outlet stores and discount stores than full-price shops,” wrote the Business of Fashion in its 2016 review. “This focus on promotions and discounts is, moreover, becoming increasingly prevalent in other markets, such as China — where outlet malls are booming, and set to double in number by 2020.”
Tanger Factory Outlet Centers Inc. (NYSE:SKT), the only retail REIT focused entirely on outlet stores, has been a major recipient of this move to cheap. With markets all over the world looking to go discount, Tanger has plenty of future real estate acquisition opportunities ahead of it.
If you’re going to invest in a retail REIT, SKT operates in the retail sweet spot. Interestingly, Tanger stock has performed somewhat erratically the past five years; brace yourself for the odd down year, but overall, I like its business model better than most.
The Retail REIT to Wait on: Saul Centers Inc (BFS)
Dividend Yield: 3.1%
I don’t have anything particularly negative to say about Saul Centers Inc (NYSE:BFS) except that its stock is up 30% over the past year, almost double the S&P 500 and six times its peers.
In fact, between 2012 and 2016, the owner of primarily Washington D.C.-area real estate, generated total annual returns for shareholders of 24.9%, 14.9%, 23.1%, -7.4% and 33.5%.
Its Q3 2016 earnings report showed a healthy $2.30 in funds from operations through the nine months ended Sept. 30. Relying on grocery anchors to bring in other tenants, 94.7% of its commercial portfolio is leased.
That said, given the uncertainty facing brick-and-mortar retail and a stock price that has clearly been on a good run since 2012, regressing to the mean is a real possibility.
More than anything, this is a valuation call. Fundamentally, Saul Centers is a sound retail REIT.
Retail REIT to Buy No.2: Brookfield Property Partners LP (BPY)
Dividend Yield: 5%
My final selection is breaking the rules, but in this uncertain retail environment, owning shares in one of the world’s greatest real estate investors makes a heck of a lot of sense in my opinion.
Brookfield Property Partners LP (NYSE:BPY) owns 126 retail properties in the U.S. through its 34% ownership interest in General Growth Properties Inc (NYSE:GGP). Brookfield’s parent, Brookfield Asset Management Inc (NYSE:BAM), owns 68% of BPY’s voting shares.
In addition to its retail portfolio, BPY owns 149 iconic office properties around the world, including Canary Wharf in London and Brookfield Place in New York. With a 91% occupancy rate and an average lease term of eight years, BPY’s revenue just keeps on coming.
If you’ve never heard of BAM, CEO Bruce Flatt and his team are considered truly brilliant. Over the past 20 years, Flatt and company have generated an 18% annual return for shareholders, right up there with Warren Buffett.
This is the smart way to play retail REITs.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.