Although you may dread it if you’re between the ages of five and 18, the back-to-school period at the end of August is the second-biggest shopping season for US retailers. The National Retail Federation estimates that parents of K-12 and college students will spend a record $75.8 billion this year, up 11.5% from 2015.
This shopping includes school supplies, clothes, electronics, and household goods for dorms and apartments. It occurs at all types of retailers, but shoppers are favoring discounters more, including off-price chains, dollar stores, and even lines like Backstage (Macy’s) and Nordstrom Rack. These tenants are most commonly located at shopping centers, prompting a closer look at this REIT sector.
Growth in jobs and wages supports higher back-to-school spending, and July’s jobs report reflected a banner month for those metrics. To boot, the Commerce Department reported a 2.5% increase in May-July retail sales from year-ago levels, even though July growth barely changed from the previous month.
August has been a difficult month for shopping center REITs. Their month-to-date return is -5.29%, but the sector’s year-to-date return of 15.79% is above the FTSE NAREIT All Equity REIT average. The shopping center REIT sector has a market cap of $84 billion and includes 19 REITs.
The six largest shopping center REITS have a market cap of more than $5 billion each and have posted strong growth in stock values this year. Each of these companies met or beat consensus earnings estimates for the quarter ended in June. Their largest tenants usually include grocers and discount/off-price stores, categories that face limited competition from online sales. Illustrating the strength of off-price stores, Nordstrom reported a decrease of 2.3% in comparable sales during the second quarter compared to year-ago levels. On the other hand, comparable sales at Nordstrom Rack/HauteLook gained 5.3%.
Despite the success, growth in online sales cannot be ignored. E-Commerce represented 7.8% of all retail sales in the first quarter, and retail e-commerce sales were up 15.2% between the first quarters of 2015 and 2016 (second quarter data is not yet available). Amazon Prime Day contributed to the 1.3% of growth in online sales nationally for July and likely impacted sales at brick-and-mortar stores for the month.
Failures among major tenants have also hit the sector. Most recently, the planned merger between Office Depot and Staples was scrapped. This prompted Office Depot to announce the closure of 300 of its 1,513 remaining stores by the end of 2018 on top of 400 stores that had already been shuttered.
The announcement of mass retail store closures can send shopping center stocks down. In reality, the announcements are not usually unexpected and create an opportunity for re-tenanting. Illustrating this trend, Dick’s Sporting Goods has bought leases for some of the 460 stores that Sports Authority is closing.
Shopping center REITs are benefitting from the nation’s economic growth. Despite store closures and competition from online retail, shopping center REITs are posting healthy earnings and above-average returns that make the sector attractive to investors.
Authored by Susan Persin
Compliments of Trepp – a member of the EACCNY