Tag Archives: Shopping mall REITs

Finding Opportunity In The Retail Apocalypse

The stocks of retail REITs have struggled lately. Malls and shopping centers are under pressure from Amazon and online shopping. But not all retailers are under extreme pressure. Home Depot, TJX Companies, Kroger, WalMart, Whole Foods (now an Amazon subsidiary), Best Buy, CVS, and Walgreen’s are financially healthy big tenants of many shopping center REITs. And that means the landlords that rent to stores that can withstand pressure from Amazon are worth a look.

We’ve listed the 7 largest shopping center REITs by market capitalization, showing their dividend yields and Price/FFO.

As a reminder FFO (funds from operations) is net income adjusted for property sales and depreciation. It’s not a perfect measure of cash flow since stripping out all depreciation can’t be accurate. Some long term capital expenditures are required to maintain property. But adjustments to FFO aren’t uniform, while FFO is. So it allows for the comparison of companies. It’s also useful in judging the safety of dividends.

The top-7 shopping mall REITs are averaging a Price/FFO ratio of 14.43 and a dividend yield of 5.3%. That’s a reasonable P/FFO ratio for healthy businesses and a decent yield since the 10-year US Treasury is 2 percentage points behind. The companies with higher valuations and lower dividend yields tend to have better property. Regency, for example, has more property than the others in California. KIMCO and Brixmor, by contrast, have a higher percentage of Midwest property, where the economy struggles, and Southeast property vulnerable to hurricanes.

All of the companies appear financially healthy, and aren’t struggling to pay interest on mortgages or dividends. Most of them are also growing net operating income (NOI). That means, though vulnerable to further encroachments from Amazon, this would be a reasonable basket of stocks to own as a small part of a dividend portfolio.

Brixmor and KIMCO, especially, could be attractive holdings at their current prices, despite being heavy in Midwest and Southeast property.  In addition to attractive dividend yields covered by cash flow and healthy balance sheets for both companies, a recent Morningstar report indicates that KIMCO has revamped its portfolio since 2010, shedding over 400 assets for $6 billion over that time.

Additionally, Weingarten Realty, though with a lower dividend yield than Brixmor and KIMCO, has 56 of its 190 properties in fast-growing Texas. More than half the landlord’s property is in Texas, Florida, California, and Arizona. Gunning for the biggest dividend yield is usually a recipe for disaster, but, currently among beaten up shopping mall REITs, it may be a reasonable course.

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Three Opportunities In The Retail Wasteland

It’s no secret that malls are under pressure from e-commerce and Amazon. Even strip malls anchored by supermarkets and stores like Target and WalMart are struggling as shoppers buy more necessities and staples online. But some shopping center REITs’ stocks have declined so much that they’re worth a look from investors. Three of the largest – Brixmor, KIMCO, and Weingarten are yielding 5.70% or more.

Covering Dividends & Interest Payments

First, all three companies can cover their dividends with funds from operations (FFO). FFO is an important REIT cash flow metric that’s useful for understanding dividend coverage. It adjusts net income for property sales and depreciation, the latter of which can be an unrealistic charge in real estate. It’s not perfect because some capital is required to maintain property every year, but it’s a decent start to see if companies can maintain their current dividends. Our three  companies are producing FFO that’s at least 38% higher than their current dividend payouts.

Second, none of our companies is carrying a dangerous amount of debt. Their fixed charge (bonds and preferreds) coverage ratios are all over 3x. The typical cash flow metric used to calculate coverage is EBITDA or earnings before interest, taxes, depreciation and amortization. Again, that’s imperfect because it doesn’t include maintenance capital expenditures, but at 3x or more it’s fair to say our companies don’t have unreasonable amounts of debt.

Same Property NOI Growth & Property Quality

Another important metric in real estate is if companies are experiencing same-property rent and net operating income (NOI) growth. Our companies are. Brixmor, however generated the lowest same property NOI growth for the second quarter of 2018 (the most recent available), and that may be why its stock is trading at the lowest FFO multiple and delivering the highest current yield.

One possible reason for Brixmor lagging in this category is that its sprawling property portfolio includes malls in less upscale areas. When looking at the amount of annualized base rent (ABR) each firm had from each city or metropolitan area, and Brixmor had only 24% of its rent come from Los Angeles, Houston, metropolitan New York City, Chicago, Miami, Washington, D.C., and San Francisco. By contrast, Weingarten had 34% of its rent come from those locations and KIMCO had nearly 39% of its rent come from those locations.

Additionally, Brixmor may have the least desirable top tenants. Weingarten and KIMCO count Home Depot and WholeFoods as top-10 tenants, but Brixmor doesn’t. Brixmor has more discount stores in its top-10, including Burlington and Dollar Tree.

Overall, all three companies are healthy, but KIMCO and Weingarten have a more attractive tenant lineup that make paying up for them worth it. Incidentally, this exercise also shows why investors need to be wary of advisors who say to them “I can get  you x% yield.” Higher yield usually comes with higher risks or, in this case, inferior real estate and tenants. You can have any yield you want, but you have to be cognizant of the risk associated with each yield.