Summary
- Retail REITs, especially in the mall space, are easily the worst performers in the sector over the last three year.
- With intensely negative investor sentiment comes opportunity. The fears surrounding some retail REITs are justified, however, and knowing which horse to saddle up with is critical.
- We were among the last prominent REIT analysts to recommend any retail REIT and are sticking with only the best of breed with the highest probability of maintaining distributions.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
- This article was co-produced with Williams Equity Research.
Following the publication of our most recent work on Washington Prime Group (WPG) and Tanger Outlets (SKT) we received multiple requests for our thoughts on Pennsylvania REIT (PEI).
In our recent article on Washington Prime, we outlined and assessed the notable progress made by management and the board alongside the significant challenges still remaining. CBL & Associates (CBL) and P-REIT inevitably and justifiably enter the discussion whenever we publish research on one of the others.
In all three cases, our position on each firm's fundamentals and asset quality remains mostly unchanged. Other factors, mostly relating to valuation, of course necessitate continually evolving our stance as investors. We aren't the only ones who group these firms together.
Source: PREIT Presentation
This chart is pulled from PEI's most recent investor presentation and shows the "club" sales from 2020 through 2019. Unsurprisingly given the source, it shows PEI performing the best. We'll be taking a much more careful look at PEI.
We'll use a real-world and much more entertaining illustration to depict what we believe is the right approach to this segment.
This is a 2015 Jaguar F-Type. The value for this vehicle is established by multiple third parties (e.g. NADA and Kelley Blue Book) and a few grand here or there notwithstanding, its value is agreed upon by the car market.
In addition, what you see is what you get. Sure, the brake pads or tires could be worn out, but a careful inspection of the car usually reveals any major issues. Even on a Jaguar.
It's also relatively easy to predict its value going forward: depreciating but at a decreasing rate. And while there may be few mechanical surprises during the ownership period, there is a reasonable probability the engine and transmission will continue to function and none of the wheels will fall off when driving to wherever overpriced restaurant Jaguar owners go out to dinner.
