Zacks REIT and Equity Trust – Retail
Realty Income Corporation
O
Federal Realty Investment Trust
FRT
Acadia Realty Trust
AKR
Industry Description
The Zacks REIT and Equity Trust – Retail industry represents a group of REITs that are 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. Location of properties and trade area demographics play the 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?
Consumers’ Spending, Widespread Vaccination Drive to Fuel Recovery: Consumers are likely to continue enjoying their spending power with rising income backed by wage compensation and large savings accumulated during the pandemic. Also, widespread vaccination has renewed people’s confidence to step out of their homes, in turn continuing to drive in-store sales and limit move-outs. Therefore, 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, with the rapid formation of new businesses in the retail sector, lease signings 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 and 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. Moreover, digitally-native brands are likely to keep boosting their physical presence in the days to come as part of the omni-channel strategy. This is because 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. Moreover, the open-air format and pick-up concepts have been helping the landlords to lure tenants even amid the health scare.
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 destination. However, the structural changes involve huge outlay, and therefore, the ones with solid balance-sheet strength are well poised to opt for such moves.
Higher Materials and Operating Costs Cast a Pall on Recovery: However, higher material and operating costs remain a concern for this industry and are likely to affect margins, while the waning of stimulus and depletion of savings might temper consumers’ willingness to spend to some extent.
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 the 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 with the reopening of the economy, 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 #77, which places it at the top 31{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} 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{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} of the Zacks-ranked industries outperforms the bottom 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} by a factor of more than 2 to 1.
The industry’s positioning in the top 50{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} 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 2.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} north, while the same for 2023 surged 22.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
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 Lags on Stock Market Performance
The REIT and Equity Trust – Retail Industry has underperformed the broader Zacks Finance sector, as well as the S&P 500 composite in a year’s time.
The industry has gained 4.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} during this period compared with the S&P 500’s rally of 11.8{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. During the same time frame, the broader Finance sector increased 7.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-FFO (funds from operations) ratio, which is a commonly used multiple for valuing Retail REITs, we see that the industry is currently trading at 16.27X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.98X. The industry is trading above the Finance sector’s forward 12-month P/E of 15.61X. 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 18.50X, as low as 10.21X, with a median of 15.45X.
3 Retail REIT Stocks Worth Betting On
Realty Income Corporation: This retail REIT derives the majority of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and a/or low-price-point component to their business. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing. This boosts the stability of rental revenues and generates predictable cash flows.
Excluding its merger with VEREIT, in 2021, Realty Income invested $6.41 billion in 911 properties and properties under development or expansion, including $2.57 billion in Europe. Realty Income expects a full-year 2022 acquisition volume of more than $5.0 billion. The acquisitions of well-located commercial properties add to the company’s scale, offering a competitive edge to its net lease industry.
With top industries selling essential goods and a robust balance-sheet position, the REIT seems well poised to grow. Currently, Realty Income carries a Zacks Rank of 2.
The Zacks Consensus Estimate for this year’s FFO per share has been revised marginally upward to $3.95 over the past month, indicating a year-on-year improvement of 10.03{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. The stock has appreciated 7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Federal Realty Investment Trust: This North Bethesda, MD-based retail REIT boasts a portfolio of premium retail assets — mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles — along with a diverse tenant base, both national and local, which positions it well for decent growth.
Federal Realty has strategically selected the first ring suburbs of nine major metropolitan markets. Due to the strong demographics and infill nature of its properties, the company has been able to maintain a high occupancy level over the years.
Moreover, Federal Realty’s focus on open-air format and “The Pick-Up” concept has poised it well to lure tenants even amid the health crisis. The resumption of the economy, widespread vaccination and solid consumer spending have poised the retail REIT to benefit from its superior assets in premium locations and experience an improving leasing environment.
Currently, FRT carries a Zacks Rank #2 and has a long-term growth rate of 5.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}. Moreover, for 2022, the stock has seen the Zacks Consensus Estimate for FFO per share being revised marginally upward to $5.93 over the past week. This also suggests an increase of 6.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} year over year. The stock has also gained 3.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
Acadia Realty Trust: This Rye, NY-based retail REIT is engaged in operation, management, leasing, revamp, and acquisition of shopping centers and mixed-use properties with retail constituents.
Acadia Realty Trust is focused on building a core portfolio which comprises mainly of high-quality street retail and urban assets, along with suburban properties located in high-barrier-to-entry, trade areas.
AKR is poised to benefit from the improving industry fundamentals. It is poised for growth internally and externally with focus on maintaining a strong leasing momentum and closing its robust pipeline of new acquisitions.
Acadia Realty Trust holds a Zacks Rank of 2 (Buy), at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised marginally upward over the past month to $1.23. The FFO per share figure for 2022 also indicates a projected increase of 11.82{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}, year on year. The stock has appreciated 3.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} over the past six months.
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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Federal Realty Investment Trust (FRT): Free Stock Analysis Report
Acadia Realty Trust (AKR): Free Stock Analysis Report
Realty Income Corporation (O): Free Stock Analysis Report
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