2023-04-17 09:00:00 ET
Summary
- Supply and demand fundamentals for Shopping Center REITs have strengthened considerably since 2019.
- Occupancy rates have climbed to their highest levels in 10 years and leasing spreads are in double digits.
- In spite of this, valuations in this sector are surprisingly low, creating lots of opportunity for value investors to profit.
- This article highlights three healthy Shopping Center REITs with very strong balance sheets and above-average dividend yield, trading at attractive prices.
The third-best performing REIT sector in 2022, Shopping Centers have stumbled out of the gate thus far this year, returning (-6.11)%, while the Equity REIT Index is flat, at (-0.30)%.
Hoya Capital Income Builder
Shopping Center REITs pay an average yield of 4.60%, well above the 3.90% REIT average, with an average payout ratio of just 60%, compared to the 65% REIT average.
Despite those juicy dividends, Shopping Center REITs are currently trading at an average Price/FFO of 13.1, well below the REIT average of 17.5. While I am primarily a FROG hunting growth investor, last year's sell-off gave me a whole new appreciation for COWs (Cash Only Wanted), and there are quite a few grazing in the Shopping Center REIT sector.
According to the latest sector report from Hoya Capital,
... the outlook for strip center REITs has improved considerably over the past year as supply/demand fundamentals in the grocery-anchored and power-center formats are now quite a bit stronger than before the pandemic... The combination of near-zero new development and positive net absorption... has driven occupancy rates to record-highs and allowed Strip Center REITs to enjoy some long-awaited pricing power. Earnings... across the strip center REIT sector have been as impressive as any property sector, with a full recovery in both FFO and NOI now complete.
As the chart below shows, occupancy rates bottomed in early 2021, and have climbed sharply to 94.7%, the highest reading in 10 years. Leasing spreads, which had sunk to 2.3% during the pandemic, have rebounded to double digits.
Store openings have nearly doubled closings since early 2022, with particular strength in 'big box' and grocery-anchored strip centers, according to Coresight Research .
The supply of new retail REIT space has slowed to a crawl, as the chart below shows. This bodes well for the next few years.
Shopping centers have adapted nicely to the new normal of competition with e-commerce. According to Hoya,
... the growing usage of alternative (and higher-margin) "delivery" options including in-store pickup, "curbside" pickup, and delivery-from-store have been a tailwind for well-located strip center REITs. Shopping centers have increasingly become hybrid distribution centers in a decentralized third-party delivery network powering "same-hour" delivery...
Here are three of the best bargains, for those interested in this sector.
Regency Centers ( REG )
Regency Centers
With a market cap of $10.3 billion, REG has over 8000 tenants in more than 400 high-quality open air suburban centers, 80% of which are grocery-anchored. These are all in coastal states (counting the Gulf of Mexico as the "3rd coast"). California and Florida locations contribute a combined 47% of the company's ABR (annual base rent), with the Northeast (greater New York and Boston areas) accounting for another 14%, and Texas kicking in 7%.
Regency Centers investor presentation
About three-quarters (77%) of NOI is derived from Premier or Premier Plus locations, characterized by strong trade areas with growing buying power in the population, surrounding a shopping center with top competitive position.
Regency Centers investor presentation
The quality of the centers is reflected in the ABR per square foot, which is among the highest in this sector.
Regency Centers investor presentation
REG's portfolio earns a TAP score of 80 from Green Street, exceeded only by Federal Realty ( FRT ) and Acadia Realty ( AKR ). TAP stands for "trade area power" (Scores range from 1 to 100). Note: SITC ranks 6th with a score of 72, and KRG 8th with a score of 67. There are 16 REITs in this sector.
Regency Centers investor presentation
The top 10 tenants account for only 20% of ABR. All of them are highly credit-worthy, and 6 of them are dynamic grocery stores expanding their physical and digital footprints.
Regency Centers investor presentation
REG Growth
Of course, the pandemic was rough on REG, but it bounced right back in 2021, and maintains low single-digit growth.
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $654 | $502 | $689 | $708 | -- |
FFO Growth % | -- | (-23.2) | 37.3 | 2.8 | 2.7% |
FFO per share | $3.89 | $2.95 | $3.50 | $4.10 | -- |
FFO per share growth % | -- | (-24.2) | 18.6 | 17.1 | 1.8% |
TCFO (millions) | $621 | $499 | $659 | $656 | -- |
TCFO Growth % | -- | (-19.6) | 32.1 | (-0.4) | 1.8% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
Meanwhile, REG shares outperformed the VNQ in each of the past three 12-month periods, returning 10.8% per annum, compared to just 1.6% for the Vanguard Real Estate ETF ( VNQ ).
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
REG share price April 12 | $44.12 | $58.35 | $69.48 | $59.99 | -- |
REG share price Gain % | -- | 32.3 | 19.1 | (-13.7) | 10.8% |
VNQ share price April 12 | $78.91 | $94.29 | $108.44 | $82.72 | -- |
VNQ share price Gain % | -- | 19.5 | 15.0 | (-24.6) | 1.6% |
Source: MarketWatch.com and author calculations
REG Balance sheet
REG's enviable, investment-grade balance sheet excels across all metrics.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
REG | 2.28 | 27% | 4.8 | BBB+ |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
REG Dividend
During the pandemic, REG cut only its Q4 dividend, so its dividend growth figures lag those numerous companies that slashed deeper. REG is a solid but not spectacular payer, with a too-safe B+ safety rating from Seeking Alpha Premium.
Company | Div. Yield | 3-yr Div. Growth | Div. Score | Payout | Div. Safety |
REG | 4.30% | 3.0% | 4.70 | 50% | B+ |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.
REG Valuation
Regency Centers shares sell for 14.7x FFO '22, a significant discount from the REIT average. REG provides the picture of stability in stormy investing seas.
Company | Div. Score | Price/FFO '22 | Premium to NAV |
REG | 4.70 | 14.7 | (-14.9)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculation
Kite Realty Group ( KRG )
Kite Realty Group
With a market cap of $4.4 billion, Kite Realty Group owns 183 properties in 9 U.S. states, comprising some 29 million square feet. Three-quarters of these centers include a grocery store, and the portfolio was 94.6% occupied at the end of 2022. Two-thirds (67%) of the company's ABR comes from centers in the Sunbelt, and another 23% comes from strategic gateway markets.
Kite also has a $33 million pipeline of signed-but-not-yet-open properties, which should drive significant NOI (net operating income) growth in 2023.
Kite Realty investor presentation
KRG enjoyed impressive double-digit ABR spreads on renewal leases in 2022, and eye-popping comparable new-lease ABR spreads upwards of 30%.
Kite Realty investor presentation
Kite has a strong and diverse roster of credit-worthy tenants, with the top 10 accounting for only 16% of ABR.
Kite Realty investor presentation
Kite also has a $103 million active development pipeline expected to come online this year and the next.
Kite Realty investor presentation
KRG Growth
Kite Realty more than tripled its revenues and cash flow in 2022, a stunning feat. As a result, its 3-year revenue and cash flow growth rates are 40% plus.
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $128 | $106 | $86 | $426 | -- |
FFO Growth % | -- | (-17.2) | (-18.9) | 395.3 | 49.3% |
FFO per share | $1.52 | $1.26 | $1.50 | $1.93 | -- |
FFO per share growth % | -- | (-17.1) | 19.0 | 28.7 | 8.3% |
TCFO (millions) | $138 | $96 | $100 | $379 | -- |
TCFO Growth % | -- | (-30.4) | 4.2 | 279.0 | 40.0% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
KRG shares have outperformed the VNQ in 2 of the past 3 twelve-month periods, rewarding investors with a sector-spanking 26.3% CAGR.
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
KRG share price April 12 | $10.03 | $19.76 | $22.24 | $20.21 | -- |
KRG share price Gain % | -- | 97.0 | 12.6 | (-9.1) | 26.3% |
VNQ share price April 12 | $78.91 | $94.29 | $108.44 | $82.72 | -- |
VNQ share price Gain % | -- | 19.5 | 15.0 | (-24.6) | 1.6% |
Source: MarketWatch.com and author calculations
KRG Balance sheet
Kite Realty has a strong investment-grade balance sheet. Though the debt ratio is 40%, earnings are so strong that Debt/EBITDA is a low 5.4.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
KRG | 2.05 | 40% | 5.4 | BBB- |
Shopping Center REITs | 1.91 | 36% | 6.1 | -- |
Overall REIT avg | 1.95 | 30% | 5.9 | -- |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
KRG Dividend
Kite Realty is a superb dividend payer. This is one of the safest high-yield investments you can make in my view.
Company | Div. Yield | 3-yr Div. Growth | Div. Score | Payout | Div. Safety |
KRG | 4.65% | 28.8% | 9.94 | 50% | B+ |
Shop Ctr REITs | 4.60% | 13.1% | 6.65 | 60% | C |
REITs overall | 3.90% | 9.4% | 5.11 | 65% | C |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
KRG Valuation
In addition to being a strong dividend payer, KRG appears undervalued at just 10.7x FFO '22, and the (-23.8)% discount to NAV is deeper than average.
Company | Div. Score | Price/FFO '22 | Premium to NAV |
KRG | 9.94 | 10.7 | (-23.8)% |
Shopping Center REITs | 6.65 | 13.1 | (-20.7)% |
Overall REIT average | 5.11 | 17.5 | (-18.0)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
SITE Centers ( SITC )
Site Centers
SITC owns 101 properties totaling 27 million square feet, located in dense, rapidly-growing, and affluent suburban areas with household incomes averaging $112,000 (3-mile radius). Almost half (46%) of ABR comes from markets in the Old South. The company's market cap is $2.5 billion.
The portfolio enjoys 92.6% occupancy, and SITC saw 8.5% blended cash leasing spreads in 2022, thanks in part to a whopping 26% on new leases. Of total ABR for 2022, 88% came from national-brand tenants.
SITE Centers investor presentation
The tenant base is reasonably well diversified, with the top 10 tenants accounting for only 24% of ABR, although TJX alone constitutes 5.9%.
Only 12% of SITC's portfolio by ABR is anchored by grocery stores. Discounters are the most common SITC anchor, followed by fitness centers, furniture stores, and sporting goods.
SITE Centers investor presentation
SITC also has a $19 million pipeline of signed-but-not-yet-open properties.
SITC Growth
The company's revenue and cash flow have fully recovered from the pandemic, but are essentially flat over the past 3 years.
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $230 | $177 | $243 | $251 | -- |
FFO Growth % | -- | (-23.1) | 37.3 | 3.3 | 3.0% |
FFO per share | $1.27 | $0.99 | $1.17 | $1.18 | -- |
FFO per share growth % | -- | (-22.0) | 18.2 | 0.8 | (-2.4)% |
TCFO (millions) | $270 | $190 | $283 | $257 | -- |
TCFO Growth % | -- | (-29.6) | 48.9 | (-9.2) | (-1.6)% |
Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations
SITC shares have outperformed the VNQ in 2 of the past 3 twelve-month periods, routing the average REIT, 22.3% per annum to just 1.6%.
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
SITC share price April 12 | $6.42 | $13.70 | $16.28 | $11.75 | -- |
SITC share price Gain % | -- | 113.4 | 18.8 | (-27.8) | 22.3% |
VNQ share price April 12 | $78.91 | $94.29 | $108.44 | $82.72 | -- |
VNQ share price Gain % | -- | 19.5 | 15.0 | (-24.6) | 1.6% |
Source: MarketWatch.com and author calculations
SITC Balance sheet
SITC has a strong, investment-grade balance sheet with excellent liquidity and low Debt/EBITDA.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
SITC | 2.07 | 33% | 5.2 | BBB- |
Shopping Center REITs | 1.91 | 36% | 6.1 | -- |
Overall REIT avg | 1.95 | 30% | 5.9 | -- |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
SITC Dividend
SITC is a sturdy dividend payer. Although the 27.6% dividend growth rate is mostly an artifact of dividend cuts during the pandemic, so the dividend score is a little exaggerated, this is a reliable high-yield investment.
Company | Div. Yield | 3-yr Div. Growth | Div. Score | Payout | Div. Safety |
SITC | 4.39% | 27.6% | 9.12 | 40% | A- |
Shop Ctr REITs | 4.60% | 13.1% | 6.65 | 60% | C |
REITs overall | 3.90% | 9.4% | 5.11 | 65% | C |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
SITC Valuation
Shares are selling at a surprisingly low 10.0x FFO '22, and a steep discount to NAV.
Company | Div. Score | Price/FFO '22 | Premium to NAV |
SITC | 9.12 | 10.0 | (-30.5)% |
Shopping Center REITs | 6.65 | 13.1 | (-20.7)% |
Overall REIT average | 5.11 | 17.5 | (-18.0)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
Investor's bottom line
REG, KRG, and SITC are all healthy, stable companies built to weather most economic conditions. All three have been trouncing the VNQ in total return, in spite of the pandemic, and all three offer stable, inflation-neutralizing cash flow, with total returns that should meet or beat inflation as the share price rises toward asset value.
In the near term, share price may disappoint, but given 2 to 5 years, I believe all three should post double-digit returns. REG and KRG are rated Strong Buy by the Seeking Alpha Quant ratings system. As always, however, the opinion that matters most is yours.
For further details see:
Attention All Shoppers: 3 Intriguing Bargains In Shopping Center REITs