Retail REITs are Cyclical at Best
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Simon Property Group (NYSE: SPG) is the largest real estate company in the world. You know those shopping malls where your teenage kids hang out and where your wife spends all of your money? Chances are, SPG owns it. They own or have interest in 337 retail real estate properties in North America and Asia. They also have a 29% stake in 270 shopping centers across Europe through publicly traded French REIT Klepierre. Klepierre recently posted a 3.1% rise in rental income for Q1 2012. Their shopping centers in Northern Europe offset the 4.4% rental income loss in Spain.
As for SPG, their first quarter earnings more than tripled. They reported a profit of $646.2 million compared with $180.2 million the year prior. In addition, SPG increased their quarterly dividend payout to $1 per share, a staggering increase of just over 5%. Is this a result of higher consumer spending? Actually, occupancy did not change much from the previous year. There was, however, a rental increase of 4.4%. All in all, shares of SPG are up 18% since the beginning of the year.
Taubman Centers (NYSE: TCO), like SPG, engages in the ownership, management, and leasing of retail shopping centers. Much smaller than SPG, they lay claim to 27 'luxury' shopping centers in the U.S. TCO also released their Q1 2012 earnings this week. The retail REIT posted a sales increase of 33%. Funds from operations were $.75 per share as compared with $.69 per share the year prior.
Tanger Factory Outlet Centers (NYSE: SKT) is another smaller competitor. SKT operates 39 outlet centers in the U.S. and Canada. SKT's Q1 2012 revenues increased by 17.1%. As such, they have outpaced the industry average. In response to this TheStreet recently downgraded SKT from a buy to a hold.
These three companies, while all highly invested in consumer spending, each represent a different niche. Simon represents the main stream, Taubman represents the upstream, and Tanger represents the downstream. This would lead one to believe that the increase in consumer spending is not restricted to a particular economic class. The upper, middle, and lower class have all gone back to similar spending habits, the recession seems just a mere memory.
SPG's strength is that its real estate investments are a bit more diversified, and it has aligned itself with a foreign company as well. A slump in one region will not result in a loss for the company. At the same time, this means it is also more exposed to the current economic volatility spreading through Europe. But its foreign interests play just a small part of the company as a whole.
Taubman and Tanger both operate fewer locations and are mainly in the U.S. Taubman caters to a bit more of a luxurious shopping experience, with outdoor malls and leases to fancier brands. Tanger, on the other hand, is an outlet store mecca. Their focus is quantity over quality. Both companies are focused within a niche, which could be a downfall. If upper class spending slows, Taubman will feel the hit. If lower class spending falls, Tanger will feel the hit. For this reason, SPG is a stronger company fundamentally.
A hold is exactly where all three of these retail REITs should be, including SPG. If economic history has taught us anything, it is that consumer spending is cyclical and largely drives economic activity. These are all good, solid companies, but with the lower dividend payouts in relation to REITs outside of the retail sector, they cannot truly be considered a great value. What is the simplest investing theory? Buy low, sell high. That directly pertains here. Wait for the next slump in consumer spending and the general economy, purchase these REITs at a discount, wait for consumer spending to rise, and then let them go before the next dip. Retail REITs play to the cycle of the economy.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.