This article is republished with permission from REITCafe.
Back-to-school is the second biggest shopping season for U.S. retailers, and the National Retail Federation estimates that parents of K–12 and college students will spend a record $75.8 billion this year, up 11.5 percent from 2015. This shopping includes school supplies, clothes, electronics, and household goods for dormitory rooms and apartments. It occurs at all types of retailers, but shoppers are favoring discounters more, including off-price chains, dollar stores, and even lines like Macy’s Backstage and Nordstrom Rack. These tenants are most commonly located at shopping centers, prompting a closer look at this real estate investment trust (REIT) sector.
Growth in jobs and wages supports higher back-to-school spending. In addition, the U.S. Department of Commerce reported a 2.5 percent increase in May–July retail sales from year-ago levels, even as July growth was little changed from the previous month.
August has been a difficult month for shopping center REITs. Their month-to-date return is –5.29 percent, but the sector’s year-to-date return of 15.79 percent is above the FTSE NAREIT All Equity REIT average. The shopping center REIT sector has a market cap of $84 billion and includes 19 REITs.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 172 | 173 | 168 | 163 | 138.5 |
| Multifamily | 167 | 172 | 166 | 168 | 139.8 |
| Office | 182 | 187 | 176 | 168 | 148 |
| Retail | 172 | 178 | 169 | 168 | 139.8 |
| Average Spread | 173.25 | 177.5 | 169.75 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.58 | 1.51 | 1.57 | 2.27 | 2.17 |
The six largest shopping center REITs have a market cap of more than $5 billion each and have posted strong growth in stock values this year. Each of these companies met or beat consensus earnings estimates for the quarter ending in June. Their largest tenants usually include grocers and discount/off-price stores—categories that face limited competition from online sales. Illustrating the strength of off-price stores, Nordstrom reported a decrease of 2.3 percent in comparable sales during the second quarter compared with year-ago levels. On the other hand, comparable sales at Nordstrom Rack/HauteLook gained 5.3 percent.
Nevertheless, growth in online sales cannot be ignored. E-commerce represented 7.8 percent of all retail sales in the first quarter, and retail e-commerce sales were up 15.2 percent between the first quarters of 2015 and 2016 (second-quarter data are not yet available). Amazon Prime Day contributed to 1.3 percent growth in online sales nationally for July and likely had an impact on sales at bricks-and-mortar stores for the month.
Failures among major tenants also have hit the sector. Most recently, the planned merger between Office Depot and Staples was scrapped, prompting Office Depot to announce the closure of 300 of its 1,513 remaining stores by the end of 2018 on top of 400 stores that had already been shuttered.
The announcement of large retail store closures can send shopping center stocks down. In reality, the announcements are not usually unexpected and create an opportunity for re-tenanting. Illustrating this trend, Dick’s Sporting Goods has bought leases for some of the 460 stores that Sports Authority is closing.
Shopping center REITs are benefiting from the nation’s economic growth. Despite challenges from store closures and competition from online retail, shopping center REITs are posting healthy earnings and above-average returns that make the sector attractive to investors.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 8/19/2016.
