Retail REITs are companies that own and manage real estate and rent space in those properties to tenants. Retail REITs have been struggling lately due to the changing retail landscape driven by e-commerce. Retail REITs have failed to adapt to the changing trends.
With the expected rise in online shopping, it could be wise to avoid Kite Realty Group Trust (KRG), NETSTREIT Corp. (NTST), and Seritage Growth Properties (SRG).
Before diving deeper into the fundamentals of these REITs, let’s discuss what’s ailing retail REITs.
Investing in retail REITs provides investors the exposure to the commercial real estate market and also helps generate regular income in the form of dividends. The potential for capital appreciation is also present as the underlying properties may increase in value over time.
Over the past few years, the retail landscape has changed drastically. Consumer spending habits have changed with the growth of online shopping, causing a decline in retail stores and malls.
Post the pandemic, the retail industry faced a setback due to the shortage of labor and supply chain disruptions. The pandemic pushed consumers toward e-commerce, leading to a huge surge in online sales. Revenue in the e-commerce market is expected to reach $1.01 trillion by 2023.
Given the expected growth of e-commerce, retail REITs could remain under pressure. Therefore, it could be wise to avoid fundamentally weak REIT’s KRG, NTST, and SRG.
Kite Realty Group Trust (KRG)
KRG is a real estate investment trust (REIT) that is one of the largest publicly traded owners and operators of open-air shopping centres and mixed-use assets. The company’s primarily grocery-anchored portfolio is located in high-growth Sun Belt and select strategic gateway markets.
In terms of the trailing-12-month AFFO/Total Revenue, KRG’s 38.57% is 7.8% lower than the 41.85% industry average. Its 1.17% trailing-12-month net income margin is 90.3% lower than the 12.11% industry average. Likewise, its 0.13% trailing-12-month Return on Total Assets is 93.2% lower than the industry average of 1.96%.
KRG’s total assets for the first quarter ended March 31, 2023, came in at $7.20 billion, compared to $7.34 billion for the fiscal year ended December 31, 2022. Its property operating expenses rose 5.3% year-over-year to $27.31 million. The company’s fee income revenue declined 23.3% over the prior-year quarter to $1.77 million.
Analysts expect KRG’s FFO and revenue for the quarter ending June 30, 2023, to decline 2.7% and 0.9% year-over-year to $0.48 and $200.80 million, respectively. Over the past three months, the stock has fallen 7.4% to close the last trading session at $20.65.
KRG’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the D-rated REITs - Retail industry, it is ranked #25 out of 30 stocks. It has a D grade for Growth and Value. To see the additional ratings of KRG for Momentum, Stability, Sentiment, and Quality, click here.
NETSTREIT Corp. (NTST)
NTST is an internally managed REIT that specializes in acquiring single-tenant net lease retail properties nationwide. The growing portfolio consists of high-quality properties leased to e-commerce-resistant tenants with healthy balance sheets.
In terms of the trailing-12-month FFO to Gross Margin, NTST’s 62.14% is 5.1% lower than the 65.46% industry average. Its 7.32% trailing-12-month net income margin is 39.5% lower than the 12.11% industry average. Likewise, its 73.96% trailing-12-month AFFO/Total Revenue is 76.7% lower than the industry average of 41.85%.
NTST’s total operating expenses for the first quarter ended March 31, 2023, increased 30.9% year-over-year to $23.90 million. Its net income attributable to common stockholders declined 24.2% year-over-year to $1.47 million. Additionally, its EPS came in at $0.03, representing a decline of 25% over the prior-year quarter.
Over the past year, the REIT has fallen 14.9% to close the last trading session at $18.03.
NTST’s grim outlook is reflected in its POWR Ratings. The REIT has an overall rating of D, which equates to a Sell in our proprietary rating system.
It is ranked #29 in the same industry. It has a D grade for Value and Sentiment. We have also given NTST grades for Growth, Momentum, Stability, and Quality. Get all NTST ratings here.
Seritage Growth Properties (SRG)
SRG is a self-administered, and self-managed REIT with 166 wholly-owned properties and 29 unconsolidated properties totaling approximately 30.4 million square feet of space across 44 states and Puerto Rico. The Company was formed to unlock the underlying real estate value of a high-quality retail portfolio it acquired from Sears Holdings.
In terms of the trailing-12-month asset turnover ratio, SRG’s 0.05x is 62.1% lower than the 0.13x industry average. Its 36.49% trailing-12-month gross profit margin is 45.6% lower than the 67.12% industry average. Likewise, its negative 312.34% trailing-12-month FFO to Gross Margin compares to the industry average of 65.46%.
SRG’s total revenue for the fourth quarter ended December 31, 2022, declined 19.6% year-over-year to $22.94 million. Its net gain declined 1.2% year-over-year to $92.45 million. Moreover, its net gain per share attributable to SRG Class A common shareholders came in at $1.62, representing a decline of 1.2% over the prior-year quarter.
Over the past three months, the REIT has fallen 39.6% to close the last trading session at $7.67.
SRG’s POWR Ratings reflect its bleak prospects. It has an overall rating of D, which equates to a Sell. It is ranked last in the REITs - Retail industry.
It has a D grade for Stability, Sentiment, and Quality. Click here to see the other ratings of SRG for Growth, Value, and Momentum.
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KRG shares were trading at $20.70 per share on Monday afternoon, up $0.05 (+0.24%). Year-to-date, KRG has gained 0.60%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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