Goldman Gives Big Boost To Retail REITs, Warns Investors Are Overlooking 5 Misconceptions

Goldman Sachs has upgraded Retail REITs to Attractive, saying that investors are overlooking five misconceptions. The brokerage recommends Buy-rated Simon Property Group Inc (NYSE: SPG) and Tanger Factory Outlet Centers Inc. (NYSE: SKT) in the sector.Retail REITs (Real Estate Investment Trusts) own and operate retail properties and generate revenue by leasing those properties to retail tenants. According to Analyst Andrew Rosivach, following are the key reasons why investors should own retail REITs.1. The analyst said Bricks & Mortar sales can grow even after Ecommerce takes share. 2. Rosivach noted that retail supply is flat or even declining. In 1980-1999, 3.5 percent of existing retail square footage was added each year, versus just 31 bps per year in 2010-2015. "Strip Center construction is occurring at a much lower rate than in the past, while the Outlet sector is still developing," Rosivach wrote in a note.3. The analyst added that anchor closings can be a "good thing," as underperforming department stores are replaced with higher-rent, traffic, and sales retailers such as Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ: ULTA), Ross Stores, Inc. (NASDAQ: ROST), Dicks Sporting Goods Inc (NYSE: DKS), and TJX Companies Inc (NYSE: TJX).4. Rosivach said REIT retail is stronger than the US average as each mall REIT averaged higher newly signed rental rates in 2015 ($35.29-$66.76) than CoStar's US average asking rate ($23.62).5. Though US mall traffic trends are unknown, they are up for Class A Mall REITs, as reported by SPG and GGP in 2015. The analyst views this is as positive.Meanwhile, Rosivach reiterated his Buy rating on Simon Property and believes believe SPG's ability to generate double-digit earnings growth will continue in 2016 and beyond. SPG is also on the Goldman's Americas Conviction List.The analyst also remains Buy-rated on Tanger as it sees the company will be able to achieve above-average earnings growth (+6.8% per year through 2020 versus REIT average of 5.5%), while carrying below-average leverage. Rosivach also retained his Buy rating on WP Glimcher Inc (NYSE: WPG), driven by deep FFO multiple discount, high but safe dividend, recent tenant improvements, and minimal exposure to international tourism.On the M&A front, the analyst continues to see medium (15-30 percent) probability of M&A activity for Tanger, DDR Corp (NYSE: DDR), and Macerich Co (NYSE: MAC). The analyst ranks each company a "2" within his departmental M&A framework. "We believe these companies each look attractive from an M&A perspective due to potential merger synergies, as opposed to an NAV discount," Rosivach added.Shares of SPG fell 1.07 percent to $206.03 and Tanger slipped 0.09 percent to $37.18.