Zacks Industry Outlook Highlights Regency Centers, Kite Realty Group and Essential Properties
For Immediate Release
Chicago, IL – July 20, 2023 – Today, Zacks Equity Research discusses Regency Centers Corp. REG, Kite Realty Group Trust KRG and Essential Properties Realty Trust EPRT.
Industry: Retail REIT
Link: https://www.zacks.com/commentary/2123799/3-top-reits-to-buy-from-a-prospering-retail-reit-industry
The Zacks REIT and Equity Trust - Retail industry constituents are poised to benefit from the renewed in-store shopping enthusiasm post-pandemic, sustained demand, limited supply, enhanced leasing and pricing capabilities for retail REITs and retailers utilizing physical locations for showrooms and pickups. Record-low vacancy rates and a trend toward open-air shopping centers reflect retailers' adaptation to shifting preferences.
Omnichannel strategies, diversification and adaptation have reduced the threat of e-commerce on physical stores, with retailers leveraging spaces for online orders and customer engagement. These have poised Regency Centers Corp., Kite Realty Group Trust and Essential Properties Realty Trust well for growth.
However, concerns arise with rising retailer bankruptcies, high expenses and potential financial stress, leading to cautious real estate decisions and a possible increase in vacancy rates.
Industry Description
The Zacks REIT and Equity Trust - Retail industry embodies a group of REITs that own, develop, manage and lease diverse retail spaces. These include regional malls, outlet centers, grocery-anchored shopping venues and power centers, including big-box retailers. Also, net lease REITs enjoy the ownership of freestanding properties, wherein both rent and the majority of operating expenses for the properties are borne by tenants.
Retail REITs are significantly influenced by the broader economic health, employment landscape and consumer spending patterns. Factors like the geographical position of properties and the demographics of the surrounding trade areas critically determine demand. While reduced footfall, store closures and retailer insolvencies once troubled the industry, it's now seeing a resurgence due to renewed consumer enthusiasm for in-store shopping.
What's Shaping the Future of the REIT and Equity Trust - Retail Industry?
Renewed In-Store Shopping Enthusiasm, Sustained Demand & Limited Supply: The retail real estate sector is poised for growth, fueled by consumers' renewed interest in unique in-store experiences post-pandemic. Physical stores, offering sustained profitability and customer engagement, have led businesses to prioritize expansion over closures. This has boosted the demand for store spaces, benefiting retail REITs through enhanced leasing and pricing capabilities.
Retailers are further capitalizing on their physical locations as showrooms and hubs for pickups or exchanges, countering the escalating costs of last-mile deliveries. However, the development of new retail venues lags due to high expenses, and many underperforming malls are transitioning to mixed-use spaces, reducing retail availability.
Also, despite a complex economic environment, the retail property sector remains robust. This resilience is evident in record-low vacancy rates, driven by limited supply and evolving demand. There's a trend toward open-air shopping centers over non-prime malls, reflecting retailers' adaptation to shifting consumer preferences and changing shopping habits.
Omnichannel Strategy, Diversification and Adaptation: Omnichannel strategies have become the central focus for retailers, and the rapid growth of e-commerce, which previously disrupted the retail commercial real estate sector, is now an integral part of retailers' sales strategies. This integration has significantly reduced the threat to physical store demand. Recent foot traffic trends demonstrate consumer preference for researching products online but completing purchases or picking up items in-store.
Retailers are leveraging their physical spaces more innovatively, using them to fulfill online orders, handle returns, test new products and engage with customers in ways that cannot be replicated online. This multifunctional approach to retail spaces underscores the continued importance and value of physical retail locations. Digitally-native brands are also increasing their physical presence to enhance customer connections and drive expansion as part of their omnichannel strategies.
Moreover, shopping centers are evolving to host a wider variety of tenant types than before, including everyday services like medical providers, fitness centers, daycares and recreational experiences. This diversification is further supported by the rise in hybrid work models and population growth in suburbs.
Economic Concerns and Retailer Vulnerabilities: Despite positive indications, including low vacancy levels, limited supply and net gain in store openings, there are looming concerns for this asset category. Particularly, the notable rise in retailers filing for bankruptcy protection in 2023 compared to the previous year comes as a warning.
Moreover, rising debt costs, high construction and operating expenses, coupled with choppy sales in certain discretionary segments, are likely to lead to financial stress for retailers. Also, a broader pullback in consumer spending, especially in a recessionary environment, could further strain the sector. Such issues might result in more cautious real estate decisions and a potential increase in vacancy rates.
Zacks Industry Rank Indicates Bright Prospects
The Zacks REIT and Equity Trust - Retail industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #81, which places it in the top 32% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Surpasses the Sector but Lags the S&P 500
The REIT and Equity Trust - Retail Industry has outperformed the broader Zacks Finance sector over the past year but underperformed the S&P 500 composite.
The industry has rallied 7.9% during this period compared with the S&P 500’s increase of 14.3%. Meanwhile, the broader Finance sector has increased 7.8%.
Industry's Current Valuation
On the basis of forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, we see that the industry is currently trading at 15.01X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.97X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.07X.
Over the last five years, the industry has traded as high as 18.61X and as low as 10.28X, with a median of 15.24X.
3 Retail REIT Stocks to Buy
Regency Centers Corporation: Headquartered in Jacksonville, FL, Regency Centers is engaged in the ownership, operation and development of shopping centers in suburban trade areas with appealing demographics. Its tenant roster includes productive grocers, restaurants, service providers and top-notch retailers.
Regency’s strategically-located shopping centers in affluent suburban areas and near urban trade areas enable it to attract top grocers and retailers and position it well to ride the growth curve. Its focus on grocery-anchored shopping centers assures dependable traffic, aiding occupancy levels and rent growth. Further, accretive buyouts, an encouraging development pipeline and a solid balance sheet are likely to drive long-term growth.
Regency Centers currently carries a Zacks Rank #2 (Buy). Over the past two months, the Zacks Consensus Estimate for the current-year FFO per share witnessed an upward revision to $4.12, calling for a 7.6% increase year over year. The stock has also risen 5% over the past month. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Kite Realty Group Trust: KRG, based in Indianapolis, IN, specializes in the ownership and operation of open-air shopping centers and mixed-use assets. As of Mar 31, 2023, the company owned interests in 181 such properties across the United States, with a total of approximately 28.5 million square feet of gross leasable space.
KRG’s portfolio is mainly grocery-anchored and located in high-growth Sun Belt and select strategic gateway markets. With necessity-based grocery-anchored neighborhood and community centers, along with vibrant mixed-use assets, KRG remains well-poised to leverage healthy market fundamentals.
Kite Realty currently carries a Zacks Rank #2. Over the past two months, the Zacks Consensus Estimate for 2023 FFO per share has witnessed a 1% upward revision to $1.97, reflecting analysts’ bullish outlook. The stock has rallied 9.6% over the past month.
Essential Properties Realty Trust: EPRT owns, acquires and manages mainly single-tenant properties, which are net leased to service-oriented and experience-based businesses on a long-term basis. The company serves casual dining, car washes, automotive services, medical services, convenience stores, equipment rental, entertainment, early childhood education, and health and fitness sectors.
With a portfolio comprising 1,688 freestanding net lease properties with a weighted average lease term of 13.9 years and a weighted average rent coverage ratio of 3.9 as of Mar 31, 2023, EPRT is well-poised to benefit from the solid fundamentals of the retail real estate market. As of Mar 31, 2023, the company’s portfolio was 99.8% leased, and this reflects the solid demand for the company’s properties.
Essential Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 FFO per share of $1.65 suggests a 7.8% increase year over year. The stock has increased 2.7% over the past month.
Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.
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Regency Centers Corporation (REG) : Free Stock Analysis Report
Kite Realty Group Trust (KRG) : Free Stock Analysis Report
Essential Properties Realty Trust, Inc. (EPRT) : Free Stock Analysis Report
