The Zacks REIT and Equity Trust – Retail industry constituents are poised to benefit from the favorable job-and-wage growth environment, which supports consumer confidence, and extra savings accumulated during the pandemic. Also, there is pent-up consumer demand as consumers look for an exclusive in-store shopping experience following the pandemic downtime.
Focus on e-commerce resistant sectors, efforts to support omni-channel retailing, adaptive reuse capabilities and opportunities emanating from consolidations have poised Kimco Realty Corporation KIM, National Retail Properties, Inc. NNN and STORE Capital Corporation STOR well for growth. However, inflationary pressure and economic slowdown might cast a pall on recovery. Also, higher e-commerce adoption might continue to affect retail landlords’ cash flows.
The Zacks REIT and Equity Trust – Retail industry represents a group of REITs engaged in owning, developing, managing and renting space in a variety of retail real estates. Among these are regional malls, outlet centers, grocery-anchored shopping centers and power centers, including big-box retailers. Also, net lease REITs enjoy the ownership of freestanding properties, wherein both rent and the majority of operating expenses for the properties are borne by tenants. The overall health of the economy, job market and consumer spending are the main drivers of retail REITs. The location of properties and trade area demographics play key roles in determining the demand for spaces. Although dwindling footfall, store closures and retailer bankruptcies have been bothering this asset category, it is on its path to a rebound amid an improving economy and solid consumer spending.
What’s Shaping the Future of the REIT and Equity Trust – Retail Industry?
Consumer Confidence, Pent-up Consumer Demand to Fuel Recovery: Consumers seem optimistic and their confidence gets a boost from a favorable job-and-wage growth environment. They are likely to continue enjoying their spending power with rising income backed by wage compensation and extra savings accumulated during the pandemic. Also, there are signs of peaking inflation as prices in July remained unchanged from June. Further, this industry is poised to benefit from the pent-up consumer demand as consumers look for exclusive in-store shopping experience following the pandemic downtime. Amid these, retailers’ focus has now shifted from the closing of stores to the revival of their growth plans, resulting in more demand for physical store spaces and paving the way for the retail REITs to experience gain in leasing activity, pricing power and flourish. Retailers are also focusing on investments in their stores because apart from serving as showrooms, physical stores offer a convenient location for pick-up or exchange of goods, helping retailers counter the increasing costs associated with last-mile delivery. Furthermore, amid limited availability and with the rapid formation of new businesses in the retail sector, lease signings, rent and occupancies in retail real estates are likely to get a boost.
Omni-Channel Strategy, Structural Changes Remain Key Focus: Omni-channel is the focal point for retailers. Physical stores will be a vital sales channel over the long run because though there is convenience in online shopping, it cannot replace the benefits and satisfaction of visiting a brick-and-mortar store. This is quite evident from the recent foot traffic at retail destinations. Moreover, digitally-native brands are likely to keep boosting their physical presence in the days to come as part of the omni-channel strategy as the opening of stores helps them improve their connection with customers and drive expansion. In fact, for retailers, the focus now is not only on boosting their online presence but also on maintaining brick-and-mortar stores in the best locations, which in turn is raising hopes for retail REITs that focus on such locations. Also, with the waning impact of the pandemic, entertainment and dining concepts are seeing a revival, boosting retail REIT’s growth scopes.
Repurposing and Conversions Pick Up Pace: Adaptive reuse as well as the conversion of malls into distribution hubs has accelerated as these distribution centers, being situated close to consumers of retailers, facilitate faster delivery of products and aid retailers in improving services, lower costs and make optimum asset utilization. Also, retail REITs are now focusing on adaptive reuse, which includes multifamily, hotel, office and medical components, resulting in the construction of mixed-use real estate destinations. Moreover, the open-air format and pick-up concepts have been helping the landlords to lure tenants. As the structural changes involve a huge outlay, the ones with solid balance-sheet strength are well poised to opt for such moves.
Inflationary Pressure, Economic Slowdown Cast a Pall on Recovery: Higher material and operating costs remain a concern for the retailers and this, in turn, might cast a pall on their landlords’ cash flows. Moreover, a slowdown in the economy and the depletion of savings might temper consumers’ willingness to spend to some extent. Also, with office usage affected and international tourism yet to regain lost ground, certain submarkets remain choppy.
Higher E-commerce Adoption to Remain a Concern: Consumers’ habits have transformed at a rapid pace over the past years and traffic at retail real estates has suffered, with e-commerce capturing market share from brick-and-mortar stores. Social distancing measures further aggravated this as even the reluctant ones, who once favored in-store purchases, started preferring online purchases to avoid physical contact. Though the preference for brick-and-mortar stores has again picked up pace now, the concern with higher e-commerce adoption is still there as more consumers have been learning about the convenience of online purchases.
Zacks Industry Rank Indicates Bright Prospects
The Zacks REIT and Equity Trust – Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #57, which places it in the top 23% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group’s growth potential. Over the past year, the industry’s FFO per share estimate for 2022 moved 3.7% north.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperfoms Sector & S&P 500
The REIT and Equity Trust – Retail Industry has underperformed the broader Zacks Finance sector as well as the S&P 500 composite over the past year.
The industry has declined 22.1% during this period compared with the S&P 500’s fall of 14% and the broader Finance sector’s decline of 12.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations), which is a commonly used multiple for valuing Retail REITs, we see that the industry is currently trading at 13.84X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.07X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.55X. This is shown in the chart below.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 18.49X, as low as 10.20X, with a median of 15.39X.
3 Retail REIT Stocks Worth Betting On
Kimco Realty Corporation: Jericho, NY-based Kimco Realty is a leading publicly traded owner and operator of open-air, grocery-anchored shopping centers and mixed-use assets in the United States.
The company’s acquisition of the grocery-anchored shopping center owner — Weingarten Realty Investors — in 2021 has been beneficial as the combined company is poised well to benefit from the increased scale, density in the key Sun Belt markets and a broader redevelopment pipeline.
Kimco is expected to benefit from its presence in the drivable first-ring suburbs of its top major metropolitan Sunbelt and coastal markets, which offer several growth levers. Also, the conveniently located grocery-anchored properties and focus on last mile assets augur well. Kimco’s strong balance-sheet position helps it to sail through any mayhem and bank on growth opportunities.
Currently, Kimco carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for this year’s FFO per share has been revised marginally upward to $1.56 over the past month, indicating a year-on-year improvement of 13%. The stock has appreciated 7.7% so far in the quarter.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
National Retail Properties: This Orlando, FL -based retail REIT focuses on investing in high-grade retail properties usually subject to long-term, net leases. It is poised to gain from the selective acquisition of more than $150 million in new properties in the second quarter.
With a portfolio of 3,305 properties in 48 states with a gross leasable area of approximately 33.8 million square feet and a weighted average remaining lease term of 10.6 years as of Jun 30, 2022, National Retail Properties is well poised to benefit from the industry’s rebound.
Currently, NNN carries a Zacks Rank #2 and has a long-term growth rate of 4%. Moreover, for 2022, the stock has seen the Zacks Consensus Estimate for FFO per share being revised marginally upward to $3.18 over the past month. This also suggests an increase of 3.9% year over year. The stock has also gained 4.4% quarter to date.
STORE Capital Corporation: This Scottsdale, AZ-based STORE Capital is engaged in the acquisition, investment and management of Single Tenant Operational Real Estate. This REIT has emerged as one of the fastest-growing net-lease REITs. Its customers consist of regional and national companies with a strong track record of growth. STORE Capital has a diverse investment portfolio. Also, geographically, its investments are spread across 49 states.
This diversification is likely to continue to aid STOR to enjoy steady rental revenues. The company is also active on the investment front and capital recycling. It is poised to benefit from an increase in the real estate investment portfolio size.
Its direct origination model results in a healthy and active investment pipeline, and the company’s focus on service, manufacturing and service-oriented retail industries, which are essential, helps secure steady cash flows.
STORE Capital holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised marginally upward over the past week to $2.26. The FFO per share figure for 2022 also indicates a projected increase of 20.2%, year on year. The stock has appreciated 3% so far in the quarter.
Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.
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