Retail real estate investment trusts (REITs) reported pretty decent results for the second quarter, despite the negative headwinds buffetting retail in general.
“2Q17’s operating results largely confirmed that fundamentals are still fairly intact, though the (deceleration) trend is clear, ” writes Mizuho analyst Haendel St. Juste in a research note published Saturday.
His nuanced view is that strip centers will be more resilient than malls going forward. He writes:
We remain cautious on retail REITs overall, but see better structural support and stronger near-term ssNOI [same-store net operating income] and earnings growth for Strips, which we think can drive outperformance in 2H17.
Many analysts think high-end malls in wealthy areas that offer more experiences will hold up better than strip centers, which are often anchored by grocery stores. But St. Juste thinks malls, which have higher occupancy costs and much more apparel exposure, are still bottoming while strip center REITs bottomed in the second quarter.
He upgraded Brixmor Property Group ( BRX) to Buy from Neutral for its “favorable valuation and growth vs peers.” He explains:
While we expect retail REIT waters to likely remain choppy nearterm, we see relative safety in this name given the expected resiliency of its core growth given lower rents / OCRs, no leasing amendment pressure, and embedded 2H17 occupancy upside. Our updated PT is $22 (implying 13% upside).
Brixmor shares, which yield 5.3%, were up by 1.6% to $19.84 by 11:30 a.m ET Monday while the Vanguard REIT Index Fund ( VNQ) was up 1.7% Monday morning to $83.51. It yields 3.8%.