Real estate investment trusts (REITs) and the related ETFs are defensive assets with above-average dividend yields, traits that mean the group usually isn’t a value destination. However, the Pacer Benchmark Retail Real Estate SCTR ETF (NYSEArca: RTL) and some of its holdings may be serving up some value at the moment.
RTL tries to reflect the performance of the Benchmark Retail Real Estate SCTR Index, which is made up of shopping centers, shopping malls and similar structures that are thriving enterprises filled with retail establishments and are located in prime locations with quality tenants throughout the country.
There has been plenty of talk about the rise of e-commerce and online retail companies with much of that coming at the expense of traditional brick-and-mortar retailers. While the number of store closures across the U.S. is expected to jump in the coming years, writing obituaries for shopping malls may be a bit premature.
“Traditional brick-and-mortar retail has come under pressure from the rapid growth of e-commerce as consumers shift an increasing number of their buying habits online,” said Morningstar in a recent note. “E-commerce has grown at double-digit year-over-year rates for nearly every quarter since 1999. When we focus on the categories of retail sales that people generally buy online, e-commerce’s share is now over 20%.”
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Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.
While e-commerce is the growth spot of the retail universe, growth that’s likely to continue at a torrid pace, some RETL holdings can weather that storm.
“The retail REITs that we cover have all built portfolios with high-quality retail assets that should produce continued, solid growth. The Class A properties owned by these REITs should see higher foot traffic, higher sales growth, and be less impacted by store closures than lower-quality traditional brick-and-mortar retail,” according to Morningstar. “Additionally, the long-term leases signed with tenants should protect the REITs from any short-term disruption. We think all the retail REITs in our coverage are currently undervalued and provide attractive dividend yields.”
For more information on real estate investment trusts, visit our REITs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
