Retail REIT shares rally as fear of e-commerce competition ebbs

Strong earnings from the battered U.S. retail sector, which helped lift Wall Street on Thursday, also boosted shares of the hard-hit real estate investment trusts that own the properties where the retailers are located. Sears Holdings Corp, which reported on Thursday its first quarterly profit in nearly two years, brought the retail REITs rally to roughly 7 percent since early least week.

Retail REITs pushed the overall sector to just shy of an all-time high on Thursday, with Macerich Co rising 1.6 percent and GGP Inc gaining 1.5 percent.

Both Macerich and GGB own high-end Class A malls. Close behind was Simon Property Group, the largest retail property owner among the REITs, which rose 0.58 percent.

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"We got a snap-back," said Scott Crowe, chief investment strategist at CenterSquare Investment Management, a unit of the Bank of New York Mellon Corp (BK.N). "We're getting a little bottom put into the sector."

Stocks of the retail REITs, a small sub-sector, have been crushed by more than 30 percent since last summer. They have started to turn higher as investors focus on those expected to survive the e-commerce onslaught, which has robbed their tenants of foot traffic and sales.

Analysts said fears that malls and shopping centers were engulfed in a death spiral were overdone. Lower quality centers, with low foot traffic and undesirable stores, will bear the brunt of downsizing.

"There will be some winnowing in this space and it's largely going to happen in Class B and C malls in outer suburban locations where you just don't have the foot traffic or the barriers of entry," said Jay Leupp, who helps oversee some $1.4 billion in global real estate assets at Lazard Asset Management.

TOP PROPERTIES HOLD UP

The owners of high-end malls in premium urban locations are poised to deliver 5 percent to 6 percent dividend growth over the next two to three years, he said.

"Their properties are in high demand, both by brick and mortar retailers, traditional and new concepts as well as online retailers that are using omni-channel strategies," Leupp said. An omni-channel strategy combines online selling with an actual store.

Vacancy rates at malls have declined from 5 percent in 2009 to 4.3 percent in the first quarter of this year, according to brokerage Jones Lang LaSalle and CoStar Realty Information.

The data also shows asking rents are up from a post-recession bottom of $16.26 a square foot in the first quarter of 2015 to $19.81 in the first three months of the year.

One example of an investor putting money behind the retail REIT sector is the nearly $500 million spent by Long Pond Capital LP, a hedge fund that mostly invests in well-capitalized real estate and related assets that are in distress.

Long Pond Capital declined to discuss its portfolio, a glimpse of which can be seen in filings with the Securities and Exchange Commission that show its holdings as of March 31.

"Tactfully, I would not be going out and shorting a lot of retail REITs, they've gone down a lot," said Crowe.