Thanksgiving is on Thursday, which means Black Friday is less than 72 hours away.
Admittedly, that might not mean much to most of my readers, and for more than one reason. For one thing, there’s only a very specific subset of humanity that enjoys waking up at 3:00 or 4:00 in the morning to:
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Sit in traffic.
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Fight through crowds.
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Risk drag-down-knock-out fights to grab particular items off store shelves.
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Stand in line for 30 minutes or more in order to purchase whatever you managed to get your hands on.
If that’s your thing, more power to you. But I’m not a big shopper even at normal hours of the day when everyone is acting civilized. I’m much more about hunting for investing bargains than big-screen TVs and Armani suits.
This brings me to another reason why you might not care about Black Friday this year. To quote USA Today, the unofficial holiday “seems to be more of a Black November as deals start early at major retailers like Walmart, Target, Best Buy, Staples, and Amazon.”
In short, big retailers have been rolling out deals for weeks. They understand that the rise of online shopping, the 2020 shutdowns, and the past three years’ inflation have changed consumer habits.
So, in order to lock in as much profit as they can this holiday season, they’re pushing extended deals both online and in-store.
How well will that work? Considering how, according to a Gallup poll last month, the economy was voter’s No. 1 concern… I’m not going to speculate one way or the other. At least not yet.
But what I’m more than willing to talk about right here and now is those companies’ landlords. Retail real estate investment trusts, or REITs, are in a great place going into the holiday season.
It’s a sector I’m very willing to buy and hold. Especially considering how there are no lines I need to wait in.
Again, at least not yet.
Most REITs Remain Underestimated
I say there are no lines to wait in because REITs are still in the doghouse these days.
Despite the Federal Reserve cutting rates by 75 basis points – with the market expecting another cut them again next month – and despite REITs’ excellent balance sheets going into and staying through this year – the REIT-heavy Vanguard Real Estate Index Fund ETF (VNQ) is still woefully lagging the S&P 500, as shown below:
Not to worry though. That just makes for better entry points for a number of excellent retail REITs, from shopping centers to malls.
Outlet centers, the third category of retail REIT, are in a particularly attractive place whenever the economy sours. Yet, even better, they also tend to retain their appeal during better times since most people still like a good bargain.
As I write in REITs for Dummies:
Outlets don’t enjoy the same sales per square foot as many A- and B-class malls… But their tenant profit margins are superior due to the lower costs of occupancy, customer acquisition, and logistics. Plus, they provide consistent value for quality merchandise from many sought-after brands.
Now, the only pure-play outlet REIT is Tanger (SKT), a true outlier that I recommend in the depths of COVID-19 Thanks to some powerful cell-phone data analytics our team obtained, we saw shares return 426%, which means Tanger shares are no bargain this holiday season.
Even in these REIT-wary times we’re in, investors recognize Tanger’s appeal.
Funny enough though, things are looking pretty rosy on the more pricey end of the shopping spectrum, too. Simon Property (SPG) is a mall REIT that mainly caters to more affluent crowds with 3,000-plus market-leading brands among its tenants. And its Shops at Crystals in Las Vegas is “the only all-luxury shopping destination in the world,” featuring stores like Hermès Paris, Versace, Louis Vuitton, and Prada.
Yet Simon boasts the best balance sheet in the industry thanks to a combination of loyal customers, select locations, and top-notch management.
Big Retail Bankruptcies Aren’t Adding Up How You Might Think
With bankruptcy filings by big names like Red Lobster, TGI Fridays, rue21, Joann, Express, and Big Lots… along with downsizing by companies like Advance Auto Parts (AAP), CVS, (CVS), and Family Dollar…
It might surprise you that many shopping center REITs are doing just fine.
These landlords work hard to be in the best of the best locations, only choosing properties with predictably heavy traffic. So while they might have exposure to struggling retailers, they often hold the last stores to close – if they’re going to close at all.
Many of them are also anchored by leading grocery providers, whether Safeway on the West Coast, Publix in the Southeast, or Kroger in states like Indiana, Ohio, and Virginia. In which case, even if smaller tenants come and go, these shopping center REITs continue to thrive.
I won’t say it’s ever exactly easy to fill vacated retail space. But it becomes far less challenging when you’ve got strong foot traffic appeal.
It’s also much less difficult when shopping center construction is down as it has been since 2008. Nor are there signs of it picking up anytime soon. That means already existing locations have a much better shot of signing on tenants and keeping them.
And here’s another point of consideration: There are actually more stores opening than closing these days.
No. Really. It’s true.
In fact, The Wall Street Journal wrote about this larger phenomenon earlier this year, right after Red Lobster announced its bankruptcy proceedings. In “Bankruptcies Have Left More Stores Vacant, but the Space Doesn’t Sit Empty for Long,” it writes how shopping center REIT:
Kimco Realty owns [a Red Lobster restaurant] marked for closure. While that would have caused concern for the property owner a few years ago, these days, it is more of an opportunity. The firm is already fielding inquiries about the space located outside of Tampa, Florida, including from fast-food joint Raising Cane’s, coffee chain Dutch Bros, and Fifth Third Bank.
“It’s a nice time to be getting spaces back because you have the ability to pick a best-in-class retailer,” said Conor Flynn, Kimco’s chief executive. “You’re able to push rents.”
So don’t be fooled by the seemingly shaky retail landscape. There are definitely stores that are struggling, but that doesn’t mean their landlords automatically are.
Many retail REITs are thriving as we head into the holiday season. And since I see more good things for them in 2025 – including, perhaps, some merger and acquisition activity – I’ll take the Black Friday discounts they’re dishing out right now and call it a very merry Christmas indeed.
Regards,
Brad Thomas
Editor, Wide Moat Daily
MAILBAG
What are your thoughts about Brad’s comments on REITs? Do you also see more good things coming in 2025? Write us at [email protected].