Santa Claus Is Coming To REIT Town
- It has become increasingly apparent that balance sheet management is the most important lever.
- Our picks are closely scrutinized for dividend safety and the quality of underlying earnings.
- The blue lights are flashing in the retail sector, and many investors are hoping to fill up their stockings with shares of deeply discounted REITs.
I can’t believe it’s less than 90 days until Christmas, and that means it’s time to start telling my youngest kids, “you better watch out, you better not cry. You better not pout, I’m telling you why“.
Since I have five kids, maybe I’m the one who should be crying, but for REIT investors, now is the time to be “making a list and checking it twice” and find out which REIT is “naughty or nice”.
Especially in the retail REIT sector, where scrooge has created some terrific opportunities – perhaps bargains – that could help all of the boys and girls sleep well at night.
There’s a lot to get excited about in the retail sector, for example, in a recent Forbes article I explained:
“In the retail REIT sector, we are not just waiting for the gopher to tell us it will emerge from its burrow to see its shadow and retreat due to weather. Instead, we recognize that clouds will dissipate, and spring will arrive, and as value investors, we can certainly spot the bargains today.”
I recently listened to a podcast (Where We Buy with James Cook and Lauren Thomas with CNBC). Some of the highlights worth noting:
- Groups including Deloitte and the National Retail Federation are pretty optimistic about the holiday season, from this November through January 2019. Deloitte forecasts a year-over-year increase between 5.0% and 5.6%. That amounts to sales of $1.10 trillion dollars (last year was about $1.05 trillion).
- Target is hiring 20% more workers this holiday season than last year, totaling 120,000 people. The company is continuing to grow its online business, and need people in the back of the store, or in warehouses, to fulfill online orders.
- Macy’s is hiring 80,000 people this holiday season, in line with previous years.
- Regarding the loss of Toys “R” Us – it’s “war,” as retailers try to pick up market share. Walmart (NYSE:WMT) and Target (NYSE:TGT) are the biggest players. Both have been adding SKUs, and Walmart is dedicating more aisles for toys, and holding weekend promotional events.
- Costco could be another winner in this category – shoppers are seeing more toys.
Let me be perfectly clear, I don’t think the retail sector is “out of the woods” and as I explained in the October edition of my newsletter (publishing this Monday), “the Retail REITs reflects expectations of subdued earnings growth and the Industrial REITs indicates that the e-commerce demand is boosting the sector’s P/FFO multiple.”
In other words, many of the retail REITs are not growing and some are actually struggling. In early 2017 I decided that the only way that I was placing hard-earned capital in the retail sector is in high-quality REITs.
It has become increasingly apparent that balance sheet management is the most important lever, and if the REIT cannot manage its cost of capital, shares will likely “eventually” underperform. Having witnessed a wave of store closures, leasing and re-development are essential and our picks are closely scrutinized for dividend safety and the quality of underlying earnings.
“Sears would also sell about $1.5 billion worth of real estate, much of which has been used as collateral in the past to generate liquidity, as part of the proposal. Some of the stores in such a transaction would be leased back to Sears, the filing said. Sears operated 866 stores under both its namesake brand and Kmart as of Aug. 4.”
As we head into the holiday season, all of the signals are suggesting that consumers are optimistic about shopping at stores, on-line, and a combination of both.
And the blue lights are flashing in the retail REIT sector, and many investors are hoping to fill up their stockings with shares of deeply discounted REITs. As an early holiday gift, I want to provide you with a handful of my top retail REIT picks … Happy SWAN investing and “be good for goodness sake”.