3 Retail REITs Look Great Amid Mini-Taper - Analyst Blog

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Convinced by the consistent pickup in economic activity and labor market improvement, the Federal Reserve has started to taper its bond buying program. The Fed will now buy $75 billion in assets every month (MBS purchases of $35 billion and Treasury bonds at $40 billion), down from the previous rate of $85 billion a month. 

But low rates are expected to continue for some more time even if the tapering progresses well in early 2014 as the Fed has reaffirmed its highly accommodative stance on monetary policy. 

An improving economy and continuation of low interest rates should be solid grounds for you to top-up your portfolio. In this regard, adding a few retail REIT stocks, which are expected to benefit the most, can well be considered.    

Retail REITs

So far this year, the retail REIT sector has witnessed improvement in fundamentals. Occupancies, leasing spreads and renewals have all exhibited a favorable trend. 

Moreover, an improving economy essentially builds up consumer confidence and the confirmation from the Fed further reinforces that. Amid this environment, we believe that the demand/supply dynamics will rule the retail REIT spectrum going forward. 

While a surge in online shopping and less number of days in the holiday season this year had initially led us to project lesser footfall in the brick-and-mortar stores, we believe that the last minute shoppers, who fear a shipping delay, would flock to these stores.

The Demand/Supply Dynamics 

Going through the demand/supply scenario, we notice that in the past several months, the supply of new retail properties in the market has essentially remained low. This is mostly because retailers have restrained from any robust expansion amid a protracted pace of economic recovery and low consumer confidence. 

But with consumers gaining confidence in recent times and stupendous competition in the retail market, fresh concepts are vying to attract customers. This, in turn, is pushing retailers to grab opportunities of adding store locations in premium malls and upgrading some as well. So amid a lower supply of new properties, the demand is steadily building up and this is expected to be the growth driver of the industry in the years ahead.

Data from the industry sources further supports our view. As per a report from the commercial real estate services firm, CBRE Group, Inc. (CBG), the availability rate for neighborhood and community shopping centers is expected to drop to 10.6% in 2014 and below 10% in 2015. In third-quarter 2013, the retail availability rate slipped to 12.3% from 12.7% at the end of 2012. We believe this tightening of retail space availability will eventually benefit the retail REIT companies which can now command a higher rent.

Retail REITs Modifying Business Model

Further, with competition intensifying among physical and online retailers, product delivery to customers has become a major zone for combat. This has consequently prompted U.S. mall operators, Simon Property Group Inc. (SPG), The Macerich Company (MAC), and Westfield Group to tie up with same-day delivery company Deliv in recent times. The move follows a similar same-day delivery deal announced by General Growth Properties, Inc. (GGP).

As online purchases have risen and online players like Amazon.com Inc. (AMZN) are gaining from it, these mall operators are leveraging on their nationwide real estate properties - mall and retail outlets - and using these as distribution centers. They are also using their infrastructure with Deliv's solution to offer this same-day delivery service to retailers. With the stores already having a presence in the cities and in the vicinity of target customers, delivery of items can be speedy as well.

This new service would be offered for purchases made at the mall as well as through the Internet from tenants in the malls that have this Deliv-powered service, thereby leveraging on the growth potential of the medium of purchase.

3 REIT Stocks to Buy Now 

In such a backdrop, we recommend 3 retail REIT stocks that still look undervalued. 

The first is Cedar Realty Trust, Inc. (CDR), which owns and operates mainly grocery-anchored shopping centers in the United States. Shares of this Zacks Rank #2 (Buy) trades at a forward P/E of 12.12x, a discount of 27.5% to the peer group average of 16.72x, and a P/B of 1.26x, reflecting a 34.0% discount to the peer group average of 1.91x. This Port Washington, New York-based company had registered an average positive earnings surprise of 21.21% over the trailing four quarters, and has a long-term earnings expectation of 11.51%. 

Excel Trust, Inc. (EXL), which mainly focuses on community and power centers as well as grocery-anchored neighborhood centers, is another stock to bet on. Shares of this California-based company trades at a forward P/E of 12.94x, a discount of 22.6% to the peer group average of 16.72x. Moreover, on a P/B basis, the shares trade at 1.12x, a 41.4% discount to the peer group. The long-term estimated earning growth rate of this Zacks Rank #2 company is 8.13% and it had registered an average positive earnings surprise of 9.76% over the trailing four quarters. 

The third stock that investors may look forward to is Ramco-Gershenson Properties Trust (RPT), which also holds the same Zacks rank. This REIT is engaged in the business of owning and managing of multi-anchor shopping centers in the U.S. Shares of this Michigan-based company trade at 13.26x, a 20.7% discount to the peer group while on a P/B basis, the shares trade at 1.48x, a 22.5% discount to the peer group. The company had registered an average positive earnings surprise of 5.54% over the trailing four quarters and its long-term expected earnings growth is 6.5%.

Bottom Line 

In addition to the solid dividend income that these REITs offer, what is attractive here is the expected price appreciation of their stocks with economic improvement and the Fed's policy. So these stocks can bring exciting overall return for you.

Convinced by the consistent pickup in economic activity and labor market improvement, the Federal Reserve has started to taper its bond buying program. The Fed will now buy $75 billion in assets every month (MBS purchases of $35 billion and Treasury bonds at $40 billion), down from the previous rate of $85 billion a month. 

But low rates are expected to continue for some time even if the tapering progresses well in early 2014 as the Fed has reaffirmed its highly accommodative stance on monetary policy. 

An improving economy and continuation of low interest rates should be solid grounds for you to top-up your portfolio. In this regard, adding a few retail REIT stocks, which are expected to benefit the most, can well be considered.    

Retail REITs

So far this year, the retail REIT sector has witnessed improvement in fundamentals. Occupancies, leasing spreads and renewals have all exhibited favorable trends. 

Moreover, an improving economy essentially builds consumer confidence, and the confirmation from the Fed further reinforces that. Amid this environment, we believe that the demand/supply dynamics will rule the retail REIT spectrum going forward. 

While a surge in online shopping and less number of days in the holiday season this year had initially led us to project less foot-traffic in the brick-and-mortar stores, we believe that the last minute shoppers, who fear a shipping delay, would flock to these stores.

The Demand/Supply Dynamics 

Going through the demand/supply scenario, we notice that in the past several months, the supply of new retail properties in the market has essentially remained low. This is mostly because retailers have restrained from any robust expansion amid a protracted pace of economic recovery and low consumer confidence. 

But with consumers gaining confidence in recent times and stupendous competition in the retail market, fresh concepts are vying to attract customers. This, in turn, is pushing retailers to grab opportunities of adding store locations in premium malls and upgrading some as well. So amid a lower supply of new properties, the demand is steadily building up and this is expected to be the growth driver of the industry in the years ahead.

Data from the industry sources further supports our view. As per a report from the commercial real estate services firm, CBRE Group, Inc. ( CBG ), the availability rate for neighborhood and community shopping centers is expected to drop to 10.6% in 2014 and below 10% in 2015.

In third-quarter 2013, the retail availability rate slipped to 12.3% from 12.7% at the end of 2012. We believe this tightening of retail space availability will eventually benefit the retail REIT companies which can now command a higher rent.

Retail REITs Modifying Business Model

Further, with competition intensifying among physical and online retailers, product delivery to customers has become a major zone for combat. This has consequently prompted U.S. mall operators, Simon Property Group Inc. ( SPG ), The Macerich Company ( MAC ), and Westfield Group to tie up with same-day delivery company Deliv in recent times. The move follows a similar same-day delivery deal announced by General Growth Properties, Inc. ( GGP ).

As online purchases have risen and online players like Amazon.com Inc. ( AMZN ) are gaining from it, these mall operators are leveraging on their nationwide real estate properties - mall and retail outlets - and using these as distribution centers. They are also using their infrastructure with Deliv's solution to offer this same-day delivery service to retailers. With the stores already having a presence in the cities and in the vicinity of target customers, delivery of items can be speedy as well.

This new service would be offered for purchases made at the mall as well as through the Internet from tenants in the malls that have this Deliv-powered service, thereby leveraging on the growth potential of the medium of purchase.

3 REIT Stocks to Buy Now 

In such a backdrop, we recommend 3 retail REIT stocks that still look undervalued. 

The first is Cedar Realty Trust, Inc. ( CDR ), which owns and operates mainly grocery-anchored shopping centers in the United States. Shares of this Zacks Rank #2 (Buy) trades at a forward P/E of 12.12x, a discount of 27.5% to the peer group average of 16.72x, and a P/B of 1.26x, reflecting a 34.0% discount to the peer group average of 1.91x. This Port Washington, New York-based company had registered an average positive earnings surprise of 21.21% over the trailing four quarters, and has a long-term earnings expectation of 11.51%. 

Excel Trust, Inc. ( EXL ), which mainly focuses on community and power centers as well as grocery-anchored neighborhood centers, is another stock to bet on. Shares of this California-based company trades at a forward P/E of 12.94x, a discount of 22.6% to the peer group average of 16.72x.

Moreover, on a P/B basis, the shares trade at 1.12x, a 41.4% discount to the peer group. The long-term estimated earnings growth rate of this Zacks Rank #2 company is 8.13% and it had registered an average positive earnings surprise of 9.76% over the trailing four quarters. 

The third stock that investors may look forward to is Ramco-Gershenson Properties Trust ( RPT ), which also holds the same Zacks rank. This REIT is engaged in the business of owning and managing of multi-anchor shopping centers in the U.S.

Shares of this Michigan-based company trade at 13.26x, a 20.7% discount to the peer group while on a P/B basis, the shares trade at 1.48x, a 22.5% discount to the peer group. The company had registered an average positive earnings surprise of 5.54% over the trailing four quarters and its long-term expected earnings growth is 6.5%.

Bottom Line 

In addition to the solid dividend income that these REITs offer, what is attractive here is the expected price appreciation of their stocks with economic improvement and the Fed's policy. So these stocks can bring exciting overall return for you.



AMAZON.COM INC (AMZN): Free Stock Analysis Report

CBRE GROUP INC (CBG): Free Stock Analysis Report

CEDAR SHOPN CTR (CDR): Free Stock Analysis Report

EXCEL TRUST INC (EXL): Free Stock Analysis Report

GENL GRWTH PPTY (GGP): Free Stock Analysis Report

MACERICH CO (MAC): Free Stock Analysis Report

RAMCO-GERSHENSN (RPT): Free Stock Analysis Report

SIMON PROPERTY (SPG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AMZN , CBG , GGP , MAC , SPG

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