RPT - RPT Realty: Undeservedly Discounted

2023-08-23 03:40:29 ET

Summary

• Retail REITs have become opportunistic investment opportunities, particularly in the retail sector.
• RPT Realty has experienced a relative collapse in share prices despite positive operating results.
• RPT Realty offers investors access to retail cash flow and real estate at a lower price compared to peers.

Thoughtful investors do well to occasionally pause, take measures of macroeconomic factors relative to markets, and plot new ways forward. Earlier this month, as earnings season came to a close, Dane Bowler took precisely that kind of look at retail REITs and opined that share prices had become opportunistic. An August 21 Wall Street Journal article identified retail as a bright spot in commercial real estate. If you consider where share prices have gone over the last month, the argument moves from academic to actionable.

Sector Spotlight: Retail REITs – 1 month share price performance

Of glaring note is the relative collapse of RPT Realty (RPT). Like the other shopping center REITs highlighted in Dane’s article, RPT’s 2Q23 operating results demonstrated significant progress in leasing, occupancy, and same store NOI. In this article, we will take a closer look at RPT Properties to determine whether the market action signals a warning or an investment opportunity.

The Company

RPT Realty has an ~$800MM market capitalization that represents the perceived value of its equity interest in 62 open-air shopping centers mostly located in the full latitudes of the eastern/central United States.

In recent years RPT has become more significantly suburban (good), with national tenants (good), and highly grocery anchored (also good).

Within that national tenant mix and the justification to the first of the “Why RPT” items above was RPT’s not-insubstantial exposure to the now demised Bed Bath and Beyond. In a Seeking Alpha article last September, we itemized the 168 Bed Bath and Beyond properties owned by REITs and RPT ranked rather high with BBBY occupying 12 properties and providing 2.4% of RPT rental revenues. RPT management echoed the sentiments of most of the other REITs in forecasting that getting back the underpriced Bed Bath properties would be a boost to earnings. Thus far, they have delivered on that claim with strong re-leasing.

Having re-leased 4 of the 12 Bed Bath boxes for 30% rent roll-ups, management claims their new tenant roster has a halo or snowballing effect in signing and renewing additional leases.

The 2Q23 blended rent spread of 21.1% on strong volumes enabled RPT to reiterate their 2023 earnings guidance despite some downtime from the new BBBY vacancies. That reiteration is the biggest factor in making us believe the shares have become too cheap in the recent market selloff.

With FFO of $0.99/share at the forecast midpoint, RPT’s current $9.30 market price translates to a P/FFO of just 9.39x. This contrasts to the shopping center peer set FFO multiple of 12.88x. Additionally, trading at just 64% of a $14.50 consensus NAV, RPT is also more steeply discounted than peers on a net asset value comparison.

From a REIT investor perspective, comparing sector components’ implied capitalization rates is illustrative. RPT’s implied capitalization rate north of 11% leads us to believe our dollars are buying a lot more shopping center than what we get in buying shares of Kimco (KIM) at a 7% implied cap rate.

Sector Spotlight: Retail REITs – Implied Capitalization Rate

Different Options in the Same Sector

This report began by acknowledging the relative strength of the retail sector within a rather troublesome looking commercial real estate landscape. The retail REITs in the pricing graphics vary by geographic submarkets and capital structure, but they are similar in that they each want to own the real estate we visit to buy our groceries and clothes. By the metrics presented here, RPT Realty shares give investors access to retail cashflow and real estate at a lower price.

We recently got long RPT stock.

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