Zacks Industry Outlook Highlights Tanger and Urban Edge Properties
For Immediate Release
Chicago, IL – January 5, 2024 – Today, Zacks Equity Research discusses Tanger Inc. SKT and Urban Edge Properties UE.
Industry: Retail REITs
Link: https://www.zacks.com/commentary/2205470/2-retail-reits-to-bet-on-amid-promising-industry-prospects
The Zacks REIT and Equity Trust - Retail industry players like Tanger Inc. and Urban Edge Properties are likely to prosper as consumers' growing preference for in-store shopping and low availability rates provide a favorable operating environment for retail landlords. The unique shopping experience provided by open-air centers over traditional malls makes them a popular choice, and retailers will likely expand in this space. Also, the advantages of omni-channel retailing and mixed-used assets outweigh the challenges posed by e-commerce.
Nonetheless, high interest rates, a rise in tenant bankruptcies and an expected curtailment in discretionary consumer spending add to the industry's woes.
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 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 is 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?
Solid Demand Trends to Continue Amid Low Supply: After a robust performance in 2023, demand for retail real estate is expected to remain solid in the upcoming period. Retailers are likely to rent out more physical stores and expand their business opportunities to satisfy the consumers' growing interest in in-store shopping. Consequently, retail REITs will experience increased demand for their spaces, leading to enhanced leasing activity.
Also, demand in the suburban regions remains strong, given the continuation of remote and hybrid work setups. Another factor aiding demand is the low supply of new units as new construction deliveries remain low, given the high costs of construction. The low retail availability rate is likely to provide a favorable operating environment for retail landlords in the near term.
Open-Air Shopping Centers to Dominate the Space: Open-air shopping centers have become immensely popular in recent times, given their ability to provide a unique shopping experience to customers with the right combination of retail and entertainment. These centers mainly depend on anchor tenants such as grocery stores, which ensure steady footfall, thus driving revenues. Also, compared with the traditional enclosed malls, open-air shopping centers require lower operating costs. Apart from these attractive features, open-air centers act as a hub of entertainment, given their large outdoor setting.
Omni-Channel Retailing, Mixed-Use Assets Gain Traction: In recent years, omni-channel retailing has gained momentum and has become the focal point for many retailers. Pandemic-fueled trends like "buy online pickup in store" and curbside pickup are becoming increasingly popular and digitally-native brands can be seen expanding their physical presence to bolster customer connections.
Through omni-channel retailing, customers can physically check their products, thus lowering the frequency of return orders. This prevents retailers from losing their margins, which is often the case with huge online return orders. Furthermore, with the continuation of hybrid work models and population influx in the suburban areas, retailers are exploring the mixed-use option to diversify their range of offerings in an attempt to capture the demand of these customers who prefer to live, work, play, stay and shop in the same area.
Macroeconomic Woes & Bankruptcies Raise Concerns: Despite some promising growth drivers for the industry, persistent macroeconomic uncertainty, a high interest rate environment and rising bankruptcies pose concerns. With the cost of construction and operating expenses standing high, asking rent growth in the near term is expected to moderate as only a few markets would be able to comply with the asking rents that are in tandem with the cost of new construction.
Also, with the resumption of student loan obligations and depleting savings, consumers are likely to pull back on discretionary spending, resulting in a moderation of retail sales growth. Further, an uptick in tenants filing for bankruptcy lately will likely hurt occupancy levels and affect retailers' profitability.
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 #55, which places it in the top 22% 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.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of the upward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group's growth potential. Since July 2023, the industry's FFO per share estimates for 2023 and 2024 have moved 1% and 1.2% upward, respectively.
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 Underperforms the Sector & the S&P 500
The REIT and Equity Trust - Retail Industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has rallied 11.3% during this period compared with the S&P 500's rise of 25.3% and the broader Finance sector's growth of 14.5%.
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 15.31X compared with the S&P 500's forward 12-month price-to-earnings (P/E) of 20.50X. The industry is trading above the Finance sector's forward 12-month P/E of 14.48X.
Over the last five years, the industry has traded as high as 18.87X and as low as 10.42X, with a median of 15.41X.
2 Retail REIT Stocks to Bet On
Tanger: This Greensboro, NC-headquartered company is an owner and operator of outlet and open-air retail shopping destinations with more than 43 years of expertise in the industry. Its portfolio of 39 shopping centers encompassing more than 15 million square feet is strategically located across tourist destinations and in the vibrant markets of the 20 U.S. states and Canada.
Given that the majority of SKT's portfolio is of an open-air format, it provides brands and retailers with an attractive and integral sales channel. Moreover, the company's centers are sought out by consumers for branded merchandise at consistent value. With open-air centers becoming increasingly popular, Tanger seems well-poised to capitalize on the solid fundamentals of the retail real estate market.
SKT currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised 1.6% upward over the past two months to $1.94, suggesting year-over-year growth of 6%. The consensus estimate for 2024 FFO per share has moved 2.5% northward over the past month to $2.03. The stock has appreciated 24.8% in the past six months.
You can see the complete list of today's Zacks #1 Rank stocks here.
Urban Edge Properties: This Maryland-based company is engaged in the owning, managing, acquiring, developing and redeveloping retail real estate, primarily in the Washington, DC to Boston corridor. Its properties are concentrated in the most densely populated, supply-constrained region in the country, assuring a steady flow of traffic.
Also, a large portion of Urban Edge's portfolio is anchored by high-performing essential retailers, which ensures stable cash flows. Given that open-air centers have become a critical component of omni-channel fulfillment, the company seems well-positioned for growth in the near term. Its healthy balance sheet position is likely to support its growth endeavors.
UE currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2023 FFO per share has been raised 5% upward over the past month to $1.25, indicating a 3.3% year-over-year increase. The consensus estimate for 2024 FFO per share has moved 4.1% northward over the past month. The stock has gained 14.5% over the past six months.
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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