To a certain extent, I’m tired of reading such overblown, negative -- almost apocalyptic-like -- headlines regarding the retail industry today.
Sure, there are some retailers in more trouble than others and at a higher risk of going bankrupt. Department store chain Sears, clothing retailer J. Crew, accesories brand Nine West and children’s boutique Claire’s, to name a few. Many of these struggling retailers’ stores were once bustling in my hometown mall, but I’ve watched the traffic come and go, as the so-called new kids on the block -- companies like Lululemon, Sephora, Zara and Nordstrom -- take their place.
In an evolving sector, nobody is safe, but that doesn’t mean the retail industry is going extinct. And malls aren’t dying. Far from it, in fact.
That being said, I haven’t been enthused with the spillover effect that’s panning out in the retail real-estate investment trust, or REIT, space. Some of the best mall and shopping center landlords have watched their stocks take unnecessary beatings over the past year because of a big misunderstanding.
High-quality, retail real estate will always have a place in the United States. If you’re worried about tenants declaring bankruptcy, think of all the innovative companies -- Amazon, even -- prepared to take over their leases. Instead of “bricks to clicks,” I’m seeing more and more “clicks to bricks.” Once internet-only brands are realizing the value in owning and operating a brick-and-mortar storefront. Retailers are playing up experiences. Pop-up shops are coming into fashion.
Now, I want to tell you a little bit more about some of my favorite companies in the sector and why they stand above the rest.
Simon Property Group
Simon -- which owns nearly 200 U.S. properties and has holdings around the globe -- in April reaffirmed its guidance for 2017, projecting that funds from operations will climb about 6 percent.
“This expected growth is a testament to the strength of our company and our ability to actively manage our portfolio to provide industry-leading returns to our shareholders, even in the current choppy retail environment,” CEO David Simon said at the time.
Sure, Simon has Sears stores in its portfolio today, but the landlord is prepared to mitigate any risk that could stem from that relationship in the future. That goes for every tenant-landlord relationship, really.
“I'm hopeful that... retailers will focus on improving their in-store experience, and that could be a lot of different ways, that could be through technology, that could be through a better look and feel, that could be through better merchandise…” CEO David Simon remarked on the first quarter earnings call, when asked about adapting in a changing retail environment.
Simon is forecasted to grow FFO/share by 10% in 2017. Given the significant pullback in price (P/FFO is 14.8x), I consider SPG to be solid BUY at this time. Assuming SPG’s P/FFO multiple moves to 18x, investors could expect to see 18% annualized returns. As the tortoise told the hare after the race, “Simon Says Quality Wins The Race.”
Taubman Centers
Taubman’s portfolio of malls averages between A+ and A quality.
Over the last 10 years, Taubman has increased the footprint of new retailers throughout its portfolio, replacing tenants that were once drawing more shoppers in than they are today. For example, a Charlotte Russe might have been replaced by an H&M. Other tenants -- that are sure to grow -- in Taubman’s malls include Amazon, Tesla, Microsoft, Warby Parker and Apple.
On the first quarter earnings call, Taubman’s CEO, Bobby Taubman, said that “the retail environment is challenging, but we still expect to deliver solid results for the year. We are clearly at a nexus point where consumer behavior is shifted and while e-commerce is a critical component of an evolving landscape, it is not the only one.”
He added that “where the dust settles, we strongly believe that A mall companies will continue to grow their income streams and will once again be recognized as valued as the high quality investment vehicle they are.”
Taubman said in the release for the full year 2017 it is expecting adjusted FFO per share to be in the range of $3.67 to $3.82 and FFO per share to be in the range of $3.50 and $3.75. Taubman is a tad more expensive than Simon, but shares are still cheap (P/FFO is 16.1x and the dividend yield is 4.1%)
Tanger Factory Outlets
Tanger is not a traditional Mall REIT, instead the North Carolina-based company owns 44 outlet centers in 22 states and Canada. The original outlet center concept was aimed to connect bargain-hunting consumers with brand-name manufacturers and Tanger’s pioneering platform was the spark for the flaming retail sector.
As the retail industry evolved, Tanger was the first to grasp the retail distribution channel in which goods could enjoy longer life cycles than the traditional clearance concept.
Tanger is the ONLY “pure play” outlet center REIT, and while shares have beaten down as hard as most Mall REITs, Tanger has NO department stores in the portfolio.
One key competitive advantage that Tanger enjoys is the company's ability to leverage its track record and brand by scaling the business model. The outlet industry is small and Tanger estimates that there is less than 70 million square feet of quality outlet space, which is smaller than the retail space in the city of Chicago.
Tanger expects its AFFO and FFO per share to be between $2.40 and $2.45, compared to a previous forecast of $2.41 and $2.47. Tanger is much cheaper than Simon and Taubman, based on traditional valuation metrics, and I consider this REIT to be the best bargain in the bin - shares are trading at 11.4x P/FFO with a dividend yield of 5.1%.
Disclosure: I own shares in Simon Property Group, Taubman Centers, and Tanger Factory Outlet Centers.
