By Ciara Linnane, MarketWatch
Talk of the demise of the shopping mall may be overdone, according to Fitch Ratings, which on Monday took a neutral stance on retail REITS, or real estate investment trusts, the entities that own and manage malls and rent space to tenants.
Mall REITs are popular with investors for their attractive dividend yields. But the sector has come under pressure this year amid a wave of closure announcements from department store chains, sporting retailers and teen clothing retailers, among others. The retail sector is going through a period of severe retrenchment as it responds to the challenge from Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +1.94% , as well as changing consumer behavior and spending habits.
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But Fitch is upbeat that bricks-and-mortar stores will continue to exist and attract shoppers, despite the inroads made by Amazon into just about every category. The ratings agency expects that about 70% of retail sales will still take place in a physical store in 2020, down from 80% today.
“Consumers by and large still enjoy shopping as a leisure activity, plus a significant portion of online sales are connected with a store visit,” Fitch Managing Director Steven Marks wrote in the first issue of the agency’s new Equity REIT Handbook.
Some mall REITS, particularly class B, will struggle to grow rents as they lose tenants, he said. But Fitch is overall neutral on the sector, a position that is considerably less bearish than others.
Outside of retail, REITS in the office and industrial space have healthier fundamentals and can expect to perform better, said Marks. A softening of demand for space is not expected to pressure rents, while jobs growth should buoy tech employment-oriented markets.
“Signs of thawing in tech IPOs and strong venture capital fundraising suggest healthy fundamentals over at least the next several months,” said Marks.
Black Friday: Malls vs. Online Shopping
Black Friday and the holiday shopping season are "make or break" for many mall owners and brick-and-mortar stores nationwide as more consumers choose to shop online. Stephen Lebovitz, CEO of CBL, which owns 73 malls in the U.S., and which chose to close its doors for Thanksgiving, explains what retailers must do to remain competitive on Lunch Break with Tanya Rivero. Photo: AP
Separately, Canaccord published a bullish note on prison REITs Monday, saying the pro-private, tough-on-crime policies of the current administration along with plans to reform immigration policy will benefit that sector. In February, Attorney General Jeff Sessions said he was reversing former President Barack Obama’s plan to phase out private prisons, arguing that it had hurt the government’s ability to meet the future needs of the federal prison system.
Obama had argued that private prisons are less safe than government-run ones.
“We believe the administration’s pursuit of additional ICE beds, in addition to capacity constraints and/or state reforms pushing for alternative corrections, create a material external growth opportunity,” said Canaccord analyst Michael Kodesch. “Furthermore, we see low risk to contract renewals in this environment across the board, with the continued exception that we are cautiously watching CoreCivic’s California out-of- state populations. “
Kodesch has a buy rating on prison REITS Core-Civic Inc. /zigman2/quotes/200590180/composite CXW +0.38% and Geo Group Inc. /zigman2/quotes/209855552/composite GEO +0.65% . Core-Civic was trading down 1.1%, while GEO was down 0.4%.
Among mall REITs, AvalonBay Communities Inc. /zigman2/quotes/201241431/composite AVB +0.74% was up 1.2% and Equity Residential /zigman2/quotes/205190279/composite EQR +0.34% was up 0.6%, while Vornado Realty Trust /zigman2/quotes/207195881/composite VNO +1.32% was up 0.1%.
Among the decliners, Taubman Centers Inc. was down 1.2%, Public Storage /zigman2/quotes/202279720/composite PSA -0.18% was down 1% and Prologis Inc. /zigman2/quotes/200785374/composite PLD +1.01% fell 0.6%.
The AMG Managers CenterSquare Real Estate Fund /zigman2/quotes/209312263/realtime MRESX +1.10% , which has about $361 million in assets and a four-star ranking from Morningstar, was up 1% and has gained 0.6% in 2017, while the S&P /zigman2/quotes/210599714/realtime SPX +1.49% as gained about 9%.
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