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There’s a lot of data to suggest that retailers are having fits. Black Friday was apparently a dud, and it looks like it and Cyber Monday will combine for an overall 3% increase in sales over last year.
That’s not awful but it isn’t great. Lower gas prices are great. The Consumer Confidence Index is the highest its been in awhile, but is still not over 100. What we’re seeing are things like grocery stores and dollars stores doing well, and luxury retailers holding their own. The problem is with the mid-level retailers.
Macy’s (NYSE: M), Dillard’s (NYSE: DDS), Target (NYSE: TGT) and their peers have seen some pretty big stock slides this year. Many of the issues surround the rise of Internet retailing, particularly Amazon.com (NASDAQ: AMZN). There’s just not a ton of reasons to go shopping in an actual store these days.
Internet vs. Mid-Level Retailers
The data from UBS Evidence Lab regarding “reasons for visiting a physical store” are pretty depressing. For the higher income earning demographic of 35 years or older, 28% go to shop at a big-box store. 22% shop at specialty stores, 17% are there only to browse for selection, 16% for bargain hunting, 6% to “hang out,” 3% to buy an item seen online and 3% to eat.
Think about how these would be different if the Internet didn’t exist. Now, because it does, anyone shopping via computer has instantaneous ability to price-compare. It’s virtually a foregone conclusion that anything you want to buy at these mid-level stores can be found at Amazon, and probably cheaper.
That helps explain why RadioShack is dead, along with Wet Seal, American Apparel (OTC: APPCQ) and Coldwater Creek (OTC: CWTRQ).
What About Shopping Mall REITs?
So if the Internet is creating that much competition, and mid-level retail is in trouble, the next question to ask is if shopping mall REITs are facing tough times ahead.
Remember how these real estate investment trusts work. The company draws down debt and purchases shopping mall real estate. It must pay interest on that debt. It does so by leasing its property to retailers in exchange for rent. In theory, the retailer pays its rent and expenses by selling all of its fine products to customers that come through its door.
But what if cash flow for the retailer falls enough to jeopardize rent payments? Or what if business is so bad at a retailer that it starts breaking leases to shut down underperforming stores? That’s a problem.
Watch Out for the Wrong REITs
In order to avoid investing in the wrong REITs, you have to dig into them to see if they are holding these mid-level retailers as clients. A few here and there aren’t so bad.
I would be careful of REITs like Simon Property Group (NYSE: SPG). Take a look at its properties, and you’ll see a ton of retailers. Look, this REIT pays 3.44%. That’s just not enough to take a risk on this sector, and the stock is only down 12% from its high. There are so many other places to get better yields, as in, just about any hotel REIT.
I think you want to avoid General Growth Properties (NYSE: GGP). While it is more of a diversified REIT, it has a pretty large concentration in shopping malls with these dreaded retailers. Again, a 2.98% yield is chump change in exchange for the risk.
If you hold any REITs at all, be sure to go to the website and see what exposure it has to shopping mall REITs. If it is greater than 5% to 10%, get out.
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