Top Three Retail Real Estate Investment Trusts Predicted for 2024
Retail-focused Real Estate Investment Trusts (REITs) are crucial in the retail sector. These REITs possess and manage various retail-related properties, such as regional malls, shopping centers, freestanding stores, strip malls, and power centers. Despite the surge in online shopping, many retailers still require a physical location to effectively serve their customers.
Let's delve deeper into the intricacies of the retail REIT sector and introduce some prominent retail REITs for potential investors.
Exploring retail REITs
Retail REITs invest, manage, lease, and develop real estate that caters to retail-related businesses. This includes properties like regional shopping malls, outlet centers, shopping centers, strip malls, and freestanding retail properties. The majority of retail REITs concentrate on a specific property type and tenant base.
Retail REITs generate income by leasing space in their properties to retailers, service providers, and various types of tenants. The majority of retail REITs utilize gross leases where the tenant pays a monthly, fixed rental rate based on the leased space's square footage. Meanwhile, REITs specializing in freestanding retail properties employ triple net leases, which require tenants to pay rent, building insurance, real estate taxes, and maintenance costs. In consequence, these structures produce stable cash flows for retail REITs. Some retail REITs also utilize ground leases, where they lease land to retailers while owning the buildings.
Benefits
The retail sector, despite challenges from increasing online sales, continues to necessitate physical real estate for direct product sales and service provision to customers. Several retail sectors remain relatively immune to e-commerce interference due to the kinds of products sold or the services offered. For instance, while consumers can procure groceries online, most still shop in physical grocery stores, which double as distribution hubs for online orders. Similarly, physical locations are best suited to sell and distribute daily necessity items and off-price goods. As a result, pharmacies, convenience stores, home improvement centers, and dollar stores continue to prosper amid the e-commerce surge, generating demand for space in retail REIT properties.
Kimco Realty
Retail REITs also benefit from specific tenant types and lease structures. Anchor tenants, such as large retailers like grocery stores, home improvement centers, and big box stores, ensure stability to a retail property through long-term leases and draw in traffic to the retail center, benefiting other tenants. Freestanding retail properties with triple net leases provide REITs with steady rental income.
(NYSE:KIM)
Risks
$16.1 billion
While retail REITs can produce substantial rental income, the sector faces various risks that could affect dividend payments. These include:
A retail REIT focused on grocery-anchored shopping centers.
- Interest rate risk: Interest rates have a notable impact on the overall REIT sector. REITs tend to borrow heavily to acquire and develop properties. As interest rates increase, interest expenses and borrowing costs ascend, while rising interest rates stimulate the income yield on lower-risk investments like bonds. Consequently, REIT stock prices often decline when interest rates increase, leading to higher dividend yields to compensate investors for increased risk.
- Recession risk: Many retailers primarily sell consumer discretionary goods. During a recession, demand for discretionary products decreases, impacting retail sales and retailers' ability to meet financial obligations like rental payments.
- E-commerce industry disruption risk: Consumers are increasingly shopping online, which impacts brick-and-mortar retailers. Many are closing locations, inducing rising vacancy levels.
Key retail REITs
Realty Income
Several retail REITs position themselves as compelling options for investors, led by:
(NYSE:O)
| Top Retail REITs | Ticker | Market Cap | Description || --- | --- | --- | --- || Kimco Realty | (NYSE:KIM) | $16.1 billion | A retail REIT specializing in grocery-anchored shopping centers. || Realty Income | (NYSE:O) | $51.2 billion | A retail REIT focused on freestanding net lease retail properties. || Simon Property Group | (NYSE:SPG) | $54.7 billion | A retail REIT targeting regional shopping malls. |
$51.2 billion
Let's examine these top retail REITs in more detail.
A retail REIT focused on freestanding net lease retail properties.
1. Kimco Realty
This retail REIT has a primary focus on grocery-anchored shopping centers.
Simon Property Group
Kimco Realty is the leading REIT concentrating on owning and managing open-air, grocery-anchored shopping centers and mixed-use properties. As of the end of 2024, it has stakes in 567 shopping centers and mixed-use assets, boasting a total of 101 million square feet of gross leasable space. The REIT focuses on acquiring shopping centers in prominent coastal gateway cities and swiftly expanding metro areas in the Sun Belt region.
(NYSE:SPG)
Kimco's shopping centers prioritize catering to essential, necessity-based goods and services for their surrounding communities. They typically feature resilient and e-commerce-resistant anchor tenants, such as grocery stores, home improvement centers, and pharmacies. Kimco also targets densely populated areas and fast-growing metros because they benefit from a persistent increase in demand for retail space.
$54.7 billion
In the past few years, Kimco has implemented strategies to bolster its long-term financial stability. It took over fellow retail REIT RPT Realty in 2024, expanding its scale and expanding its presence in crucial Coastal and Sunbelt markets. Kimco regularly invests in retail and mixed-use redevelopment to upgrade its shopping centers. The REIT also has a Special Situations Group that supports third-party retail real estate owners with capital, thus providing Kimco with the opportunity to acquire these properties in the future. These investments contribute to diversifying its income streams and generating higher foot traffic at its retail centers. Kimco boasts a strong investment-grade balance sheet to finance its investments.
A retail REIT focused on regional shopping malls.
2. Realty Income
2. Realty Income
Realty Income is the largest REIT centered on net lease real estate. By the end of 2024, it owned or managed over 15,450 freestanding properties across the United States and Europe. It strengthened its scale and range by acquiring fellow REIT Spirit Realty for $9.3 billion in early 2024. The combined company derives 79.4% of its rental income from retail properties (usually resilient and e-commerce-resistant retailers), 14.5% from industrial real estate, 3.5% from gaming properties, and 2.4% from various property types, such as data centers. About 36% of its rental income originates from financially robust tenants carrying investment-grade credit ratings.
Realty Income's focus on net lease properties has proven to be beneficial over the years. The REIT pays a monthly dividend, which it has augmented more than 125 times since its initial public offering in 1994. Overall, the REIT has continuously boosted its dividend for 30 uninterrupted years.
The primary factor fostering Realty Income's steadily rising dividend is a consistent stream of acquisitions. The company has completed corporate mergers, such as its union with Spirit Realty, and purchased billions of dollars in properties directly from owners via sales-leaseback transactions. Realty Income boasts one of the strongest balance sheets in the REIT sector, with A-rated credit, enabling it to continue acquiring properties.
3. Simon Property Group
3. Simon Property Group
Simon Property Group specializes in premier shopping, dining, entertainment, and mixed-use destinations, with properties across North America, Europe, and Asia. The company retains interests in 231 properties, totaling 184 million square feet of space, including malls and premium outlets. It also holds an 84% stake in The Taubman Realty Group, which operates 22 properties in the United States and Asia, and a 22.4% stake in Klepierre, which manages shopping centers in 14 European countries.
Simon's mall-based tenants have faced significant challenges in recent years, including the escalating adoption of e-commerce and the pandemic's negative impact on the sector. This has weighed on occupancy levels, rental rates, and its rental collection rate.
However, Simon has been working to counteract these challenges. It's investing in transformative mixed-use redevelopment projects at many of its malls. The REIT is adding new shopping, dining, and entertainment spaces. In addition, it has constructed various property types, like office buildings and hotels, at its malls, which are diversifying its revenue streams and drawing increased traffic to its malls. Simon has a robust balance sheet to finance its investments, including A-rated credit.
In exploring retail REITs, investors may consider Kimco Realty, an NYSE-listed REIT specializing in grocery-anchored shopping centers, offering potential for stable rental income due to its focus on e-commerce-resistant anchor tenants. Additionally, Realty Income, the largest REIT centered on net lease real estate, provides a consistent stream of acquisitions and monthly dividends, boasting a track record of over 125 dividend increases since its initial public offering in 1994.
