Portfolios in the retail REIT sector contain freestanding stores, shopping centers and regional malls. These are equity industrial real estate investment trusts that own and manage retail properties. Net lease REITs specialize in freestanding retail real estate with leases that have been structured such that tenants pay most of the operating expenses (i.e., maintenance, utilities, taxes) in addition to rent.
As of July 31, 2017, the census of U.S. retail REITs in the FTSE NAREIT Index is:
- 17 shopping center REITs with these averages:
- FFO* per share of $2.00
- YTD return of -12.19 percent
- Dividend yield of 5.13 percent
- Market cap of $3,710.5M
- Debt ratio: 40.3 percent
- 7 regional mall REITs with these averages:
- FFO per share of $3.73
- YTD return of -16.77 percent
- Dividend yield of 6.84 percent
- Market cap of $13,624.2M
- Debt ratio: 46.5 percent
- 8 freestanding store REITs with these averages:
- FFO per share of $1.98
- YTD return of 2.33 percent
- Dividend yield of 4.70 percent
- Market cap of $4,449.7M
- Debt ratio: 31.4 percent
*FFO is funds from operations, which measures operational cash flows
Retail REITs and Economic Conditions
Because they lease space to stores, retail REITs are especially sensitive to U.S. economic cycles. Retailers In up cycles have a better chance of making a profit, and demand for space is relatively strong. Conversely, down cycles depress demand for retail space as sales slow, bankruptcies rise and rents slide.
Online retailers are a major threat to this sector, which is composed of brick-and-mortar establishments. For 2016, retails stores had $3.9 trillion in sales versus $294 billion in online sales, and this volume is expected to rise to $414 billion in 2018. Still, 94 percent of total retail sales occur at brick-and-mortar stores, so the extinction of footfall volume is not imminent.
Per REIT.com, the retail REIT sector had a cumulative return of 198.97 percent from September 2002 to June 2017. That’s an average annualized return of 7.71 percent. For all property REITs, the numbers were 207.53 percent cumulative return and 7.91 percent annualized return over the same period. The retail REIT sector was more volatile, 12.19 percent vs 11.54 percent on an annual basis.
Three Largest Retail REITs
- Regency Centers (REG): This is the largest shopping center REIT in the U.S (market cap of $11,272.7M). It owns 428 centers with total retail space of 59 million square feet. Top grocers anchor 80 percent of the REIT’s properties. REG pitches itself as the preeminent national owner, developer and operator of shopping centers situated in densely populated and affluent areas.
| Characteristic | REG |
| FFO/Share | $3.63 |
| Price/FFO | 18.25 |
| FFO Growth | 4.82% |
| FFO Payout (Q1 2017) | 63.29% |
| Total Return YTD | -2.41% |
| Total Return 1-Year | -19.71% |
| Dividend Yield | 3.20% |
| Debt Ratio | 23.3% |
| Long-Term Rating | BBB+ |
- Simon Property Group (SPG): This is the world’s largest regional mall REIT (market cap of $6,976M), with properties in North America, Asia and Europe. SPG has retail properties in 37 states throughout the U.S. and Puerto Rico. Globally, Simon Property owns 108 malls, 67 premium outlets and 41 other properties. The company has steadily raised dividends per share each year from 2011 ($3.50) through 2016 ($6.50). Simon is well known for its commitment to environmental sustainability.
| Characteristic | SPG |
| FFO/Share | $11.19 |
| Price/FFO | 14.16 |
| FFO Growth | 8.78% |
| FFO Payout (Q1 2017) | 65.22% |
| Total Return YTD | -8.92% |
| Total Return 1-Year | -27.54% |
| Dividend Yield | 4.42% |
| Debt Ratio | 27.4% |
| Long-Term Rating | A |
- Realty Income (O): The largest freestanding retail store REIT (market cap of $15,603.9M), Realty Income has paid dividends for 565 consecutive months. The REIT contains more than 5,000 properties under long-term net lease agreements in 49 states plus Puerto Rico. It has 250 commercial tenants and 47 industries in its portfolio. The company follows a two-fold strategy of paying reliable dividends and securing low-cost capital for acquisitions.
| Characteristic | O |
| FFO/Share | $3.03 |
| Price/FFO | 18.84 |
| FFO Growth | 4.62% |
| FFO Payout (Q1 2017) | 78.70% |
| Total Return YTD | 1.81% |
| Total Return 1-Year | -16.74% |
| Dividend Yield | 4.45% |
| Debt Ratio | 28.1% |
| Long-Term Rating | BBB+ |