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Goldman Gives Big Boost To Retail REITs, Warns Investors Not To Overlook These 5 Reasons To Buy

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Goldman Gives Big Boost To Retail REITs, Warns Investors Not To Overlook These 5 Reasons To Buy

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.

Reasons To Buy

According to Analyst Andrew Rosivach, following are the key reasons why investors should own retail REITs.

Related Link: Mizuho Makes Big Retail REIT Call, Picks 10 Favorites

  • 1. Bricks and mortar sales are capable of growth even after e-commerce takes share.
  • 2. Retail supply is flat or even possibly 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 explained.
  • 3. Anchor closings can be a "good thing." Underperforming department stores are frequently replaced with higher-rent, higher traffic and higher 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. REIT retail is stronger than the U.S. average "as each mall REIT averaged higher newly signed rental rates in 2015 ($35.29–$66.76) than CoStar's U.S. average asking rate ($23.62)."
  • 5. Although U.S. mall traffic trends are unknown, they are up for Class A Mall REITs, as reported by Simon and General Growth Properties Inc (NYSE: GGP) in 2015. The analyst views this is as positive.

Meanwhile, Rosivach reiterated his Buy rating on Simon Property and believes the company's ability to generate double-digit earnings growth will continue in 2016 and beyond. Simon 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 percent per year through 2020 versus REIT average of 5.5 percent), 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.

M&A Activity

n 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 Simon fell 1.07 percent to $206.03 and Tanger slipped 0.09 percent to $37.18.

Latest Ratings for DDR

DateFirmActionFromTo
Sep 2018CitigroupDowngradesBuyNeutral
Aug 2018Deutsche BankDowngradesBuyHold
Jul 2018CitigroupMaintainsBuyBuy

View More Analyst Ratings for DDR
View the Latest Analyst Ratings

 

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