The purported demise of retail has cast a pall over more than traditional brick-and-mortar retailers. Mall-focused funds of varying quality and diversified real estate funds with interests in shopping centers (however much or little) have been affected all the same.
Real estate companies, if not completely bruised and battered as with the mall real estate investment trusts (REITs), have not posted gains in line with broader indices in an environment where everybody eyes the sector warily. Hence, there are opportunities for investors willing to do some homework.
But as with all shakeouts, there will be winners and losers. The question for investors is determining which retail concepts will survive and prosper. With that in mind, here are three real estate stocks that stand out from the crowd.
Real Estate Stocks to Buy: GGP Inc (GGP)
During the 2008-2009 financial crisis, GGP Inc (NYSE:GGP) filed for bankruptcy and went through a reorganization. When GGP was unable to access credit in order to pay back outstanding secured debt, it was forced into that situation.
However, its portfolio of high-quality grade-A mall assets weathered the crisis in good condition. Even in 2008 and 2009, regional mall occupancy was over 90%.
GGP has rightly focused its efforts on high-quality retail assets and concepts that have a contemporary appeal. As the ongoing transformation in the retail landscape continues, my sense is that lower quality assets will be hit the hardest, but that GGP will do very well. It has demonstrated an ability to redevelop properties on a select basis in order to maximize value.
At the helm pushing these efforts is CEO, Sandeep Mathrani, who has a significant amount of skin in the gain and is thus highly incentivized to grow shareholder value. In 2015, he was awarded an additional 35 million shares in stock awards.
The overall downward pressure on retail and mall REITs has left GGP trading right around its 52-week low, presenting a compelling risk/reward given its portfolio, high quality assets and aligned management.
Real Estate Stocks to Buy: Equity Commonwealth (EQC)
Famed real estate investor, Sam Zell, is the Chairman of Equity Commonwealth (NYSE:EQC). He is known for his counter cyclical investing behavior, which has contributed to his immense success. That is, he can be found disposing of assets when markets seem ebullient and buying assets when markets seem depressed.
To this point, EQC has been active. Disposals (currently six properties are for sale) have slimmed down the portfolio to 21 properties with 11.7 million square feet. It has quite a concentrated portfolio, but it’s based in exceptionally strong markets like Philadelphia and Chicago, and its 10 largest properties contribute 74% of revenue.
Rental rates in the second quarter were robust, increasing 17.6% on a GAAP basis and 10.7% on a cash basis. Leasing activity was similarly strong, signing 190,000-196,000 square feet of new leases and 252,000 square feet of renewals.
President and CEO, David Helfand, has been very clear about his intention of not “running a subscale business that has no reason to be … [as] there is still much to be done to realize the substantial value in … [its] portfolio and … explore growth opportunities.”
Real Estate Stocks to Buy: Brookfield Property Partners LP (BPY)
Brookfield Property Partners LP (NYSE:BPY) owns 35% of GGP. The company is not structured as a REIT, but it offers a REIT-like 5% dividend yield, which is at the low-end of the 5-8% distribution range that BPY has stated as its goal.
And Brookfield has a solid underlying portfolio of cash-generating assets to support this distribution in addition to high single-digit FFO growth.
Like GGP, BPY has a very strong portfolio that I would consider high quality across office and retail. The company also has what it terms an “opportunistic strategy” that looks at asset types beyond office/retail, including multifamily, industrial, hospitality, triple net lease, self storage and student housing. These assets comprise about 20% of the portfolio and target 20% total returns from a mispricing or operational value-add.
Based on the current unit price, double-digit CAGRs ten years out should be readily achievable with the distribution yield staying the same and continue FFO growth of 8-11%.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.