13354 Mon, 12/17/2007 - 5:39pm
By Michael Rudnick
NEW YORK-Freestanding retail real estate investment trusts have managed to stay in the black while shopping center and regional mall investments sink.
Healthy national retailer credit and longer-term leases associated with these freestanding stores have helped these REITs. (A REIT is a company that owns, and in some cases operates, income-generating real estate, such as apartments, shopping centers, offices and warehouses.)
Freestanding retail REITs for the year to date as of Nov. 30 logged a 4.36 percent total return. This was in contrast to shopping center REITs' 11.93 percent decline and regional mall REITs' 4.97 percent fall.
National credit-worthy retailers generally occupy freestanding retail space and while these retailers, especially in the home arena, are suffering sales declines, they are generally locked into long-term leases, leaving these store spaces secure unless a retailer defaults due to bankruptcy.
"From a stability standpoint, there is very little churn in [real estate] sales unless a company goes bankrupt [and as long as they are a credit-worthy tenant]," said Richard Moore, REIT analyst with RBC Capital Markets. "This may be driving some comfort level that malls and shopping centers don't have," he added.
While national home retailers during the current sluggish sales environment may not necessarily grow their store bases, "they will be able to pay their leases," said a REIT analyst that requested anonymity. "[Freestanding retailers] generally have single tenants--it's about keeping the tenant that you've got," he said. "They have very long-term leases that are generally backed by very high-credit large national retailers, he said. Shopping centers are more vulnerable to difficult sales environments as they tend to have a mix of large national tenants and smaller regional and local retailers.
Shopping center and regional mall REITs are on the decline this year following 2006 returns of about 29 percent and 35 percent, respectively. Shopping centers have fallen the hardest because their somewhat inflated valuations are perceived as more vulnerable in a declining market. "Shopping centers overall as an asset class had an incredible run in valuations--the concern is if we have a down market in commercial real estate like what is occurring in residential, shopping centers could be the most exposed," the analyst said.
Regional malls have not seen as sharp a decline as the shopping centers, due simply to the supply and demand equation for this real estate. "There is much less new supply of new mall space than shopping centers," said the unnamed analyst, adding that this has driven an increase in mall rent rates.
The overall downturn in retail REITs this year has had less to do with the retail sales picture and fundamentals and more to do with a fear of real estate investment from "regular investors," Moore said. The weak sales environment does not have a significant impact on this real estate as "the reality is, retailers are all thinking long-term on new store openings," he said. "They [REITs] are behaving more like they are stocks than they are like real estate." He added, "there has been a pullback by the regular investor who does not want to look at real estate now--they are afraid commercial real estate will be infected by what infected the residential market."
Home furnishings are bearing the brunt of the retail slowdown due to its strong tie to housing sales. While retailers tend to think longer term when planning store expansion, if "home furnishings is hit hard enough, the long-term outlook may have changed based on what we have seen," Moore said.