More than 15 percent growth in returns seems incredibly positive for retail real estate investment trusts — until you look at retail compared with residential, office or even self-storage stocks.
According to the National Real Estate Investment Trusts’ Equity REIT Index, as of mid-September, retail REITs provide year-to-date returns of 15.4 percent, while residential REITs popped 37.5 percent and office REITs grew nearly 30 percent.
How the mall REITs will ensure growth remains a question. With ground-up new development and acquisitions slowing, internal growth by way of redevelopment, leasing and rent increases is more critical than ever in securing earnings growth.
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“Signs of a weakening consumer have hurt sentiment and weighed on the mall stocks, and rich pricing in the acquisitions market dampens external growth via spread investment,” wrote Goldman Sachs analyst Jonathan Haberman in a midyear report. Still, “mall fundamentals should remain strong over the coming year. We favor those who create value via redevelopment over those who acquire.”
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But given the current economic climate, it may be difficult for retail REITs to go down the traditional growth avenues. “Concerns about the health of the U.S. consumer will impact the real estate owners’ ability to lease space and expand and develop centers,” said David AuBuchon, an A.G. Edwards analyst. “There’s been an overhang in retail so far this year and the group in general has underperformed.”
Of the retail REITs he covers, said AuBuchon, Simon Property Group appears to have the most positive forward movement and growth potential, much of it driven by the $5 billion it plans to invest in redevelopment by 2010. That investment, combined with a 3 percent to 4 percent property income growth and a strong balance sheet, should garner 8 percent to 10 percent earnings growth annually, if the retail environment stays consistent.
If they could pick just one retail stock, several analysts agreed the Goliath of mall REITs would be the wisest buy.
“The regional mall industry is consolidating into the hands of a few public REITs. These consolidators strongly benefit from their scale, access to capital and strong tenant relationships,” Jeffrey Donnelly, senior analyst with Wachovia Securities, wrote in a research note.
The next-largest mall REIT, General Growth, has more volatile earnings due to the unpredictability of its master-planned development division and that business’ ties to the cooling housing market. It also carries more debt, including variable-rate debt, than Simon.