Real estate is a common destination for investors seeking meaningful dividend yields; the asset-heavy nature of the business combined with certain tax advantages typically results in relatively high yields. There are, of course, substantial risks associated with investments in real estate stocks (and in particular retail real estate stocks) as well; this sector suffered some of the worst losses during the most recent recession.
The Retail Real Estate sub-sector includes 32 stocks, with a combined market capitalization of $126.5 billion. The stocks in this sub-sector operate real estate which typically houses shopping malls. Retail Real Estate comprises two industries — Retail Real Estate (30 stocks) and Specialized Retail Real Estate (2 stocks).
The adjacent table provides a summary of the Retail Real Estate sub-sector, which is characterized by:
- High payout ratios: The companies in this sub-sector are typically classified as REITs, which provides certain tax advantages for companies that pay out substantial portions of their income as dividends.
- High debt burdens: Though the Real Estate sector has deleveraged a bit in recent years, many companies still carry substantial amounts of debt on their balance sheets.
- Relatively low revenue growth: As shopping mall activity has declined, many REITs in this sector have struggled to grow revenue. Only five companies in this sub-sector have posted double-digit revenue growth over the last five years; seven stocks have seen revenue declines during that period.
The 32 stocks in the Retail Real Estate sub-sector have:
- a median dividend yield of 4.04 percent, which is lower than the broader Real Estate sector median of 4.48 percent;
- a median payout ratio of 143.93 percent (for stocks who have positive earnings), compared to 142.87 percent for the entire sector; and
- a median price-to-earnings ratio of 48.25 (for stocks who have positive earnings), compared to a sector-wide average of 35.64.
Dividends in the Retail Real Estate Sub-Sector
General Growth Properties is by far the largest Retail Real Estate stock; GGP’s $23 billion market cap represents about one-fifth of the sub-sector total. GGP is also the largest dividend payer, with annual distributions of about $550 million.
Yield and Payout Ratios in the Retail Real Estate Sub-Sector
As mentioned above, this sub-sector is characterized by high payout ratios; only five companies (UBA, AKR, STOR, WPG, CBL) currently have both positive earnings and a payout ratio below 100 percent.
Payout ratios near or even above 100 percent are extremely common in the Real Estate sector; in order to receive certain tax advantages associated with the REIT structure, companies must pay out substantially all of their income.
Revenue Growth in the Retail Real Estate Sub-Sector
Many stocks in this sector have struggled to grow revenue in recent years. While it is possible to increase dividends in the short-term without meaningful revenue growth, ultimately investors will only see cash flows increase if the top line continues to expand.
Debt in the Retail Real Estate Sub-Sector
In searching for investment opportunities among stocks in the Retail Real Estate sub-sector, perhaps the biggest red flag is the massive amount of debt. More than half of the companies in this sub-sector have debt-to-equity ratios of 50 percent or higher, with six (IRC, UBA, CDR, ADC, GTY, and WSR) topping 100 percent.
GTY is the only stock with debt-to-equity of less than 25 percent.
Retail Real Estate Stocks for the Dividend Investor
Real estate stocks have long been popular picks for investors looking to generate current income. This sector offers yields above the average for the broad market; the average for this sub-sector is currently about 4.5 percent, with five stocks yielding more than 6 percent.
However, those yields may not be attractive enough to justify some significant risks. Specifically, the meager revenue growth rates reflect a challenging operating environment for malls. While the inability to grow revenue limits the upside, there seems to be significant downside risk related to the large debt burdens carried by this sub-sector.
This article, Retail Real Estate Dividend Stocks: Sub-Sector Analysis, first appeared on Dividend Reference.