Real estate investment trust (REIT) shares have suffered as the stock market has anticipated higher interest rates. The fear of a gradual reduction in the Federal Reserve's quantitative easing program, or QE, has helped push the iShares US Real Estate ETF, a diversified holding of REITs, down nearly 9% since its summer high. But is the REIT decline a buying opportunity? It may be, especially in those companies like General Growth Properties (GGP), Pennsylvania Real Estate Investment Trust (PEI), and DDR Corp. (SITC 0.73%).

Retail REITs may appeal whether rates rise or fall
Though it's generally expected that the Federal Reserve will reduce its bond-buying stimulus in early 2014, the Fed has also made it abundantly clear that its policy will not change until the economy shows signs of more robust and sustainable growth. This stance could mean retail-based REITs would benefit whether QE is reduced or not.

A strong economy seems essential for a Fed taper. Given consumer spending accounts for about 70% of economic growth, that suggests a better time for the nation's retailers. Retail property owners would likely also thrive. Besides a more lucrative leasing environment, retail REITs can benefit directly from store sales gains. This participation, called overage rent or percentage rent, is the REIT's cut on a retailer's revenue and it can be meaningful. Simon Property Group, a leading retail real estate industry participant, garnered over $195 million of overage rent in 2012, about 6% of their total rental take.

On the other hand, retail REITs could also benefit if the economy demonstrates continued sluggish growth and the Fed keeps its current QE regime in place. A REIT's enticing dividend yield with the possibility of capital appreciation, in no small part from potential QE-driven inflation boosting property values, may be quite attractive in a stable, low-interest rate environment.

One leading retail REIT
General Growth Properties is one way to play a conducive retail REIT atmosphere. Its portfolio of 123 properties recently delivered impressive results. Funds From Operations per share increased 26% year-over-year in the latest quarter. FFO being a common method of reporting profitability in the real estate industry.

The REIT's underlying fundamentals also appear strong. Occupancy levels were 96.6% in the quarter, up from 95.5% in 2012, and the company is taking steps to increase portfolio quality. General Growth has 54 properties under construction, led by a mall development in prosperous Fairfield County, CT. It also acquired interests in a premium-brand Apple location and luxury-name Bulgari flagship store, both in San Francisco.

General Growth seems a fairly priced, solid REIT investment consideration. It trades around 17 times the company's 2013 FFO expectation of $1.15 to $1.17 per share -- in line with peers such as Simon Property Group, which also trades at a similar 17 times.

Some smaller but more intriguing plays
Pennsylvania Real Estate Investment Trust is a smaller but possibly more interesting REIT. Its 44 properties recently produced commendable results with adjusted FFO increasing 4.7% quarter over quarter and 7.3% year-to-date. Occupancy increased to 93.5%, up from 92.9% a year ago.

This REIT is also looking to improve the quality of its property portfolio. Its main strategy is divesting non-core locations. Five properties have already been sold for around $210 million and two others, on the block, have taken sizable impairment charges this year. While the company is not averse to picking up a property it deems attractive, like the $60 million Philadelphia purchase made in April, the current goal seems to be using sale proceeds to strengthen the balance sheet.

Whether due to its relatively diminutive size or portfolio restructuring, Pennsylvania Real Estate looks very inexpensive. Based on the company's mid-point 2013 FFO guidance of $1.81 per share, the shares currently trade at roughly 10 times.

DDR Corp. is another intriguing retail property owner. This REIT, owning 431 value-oriented shopping centers, reported decent results in its latest quarter. Operating FFO increased 3.7% year over year, and occupancy levels climbed to 94.8% from 94%.

The company's growth initiatives are most interesting, however. DDR acquired two regional power centers, basically big, architecturally attractive, unenclosed shopping centers that contain three or more large well-known retailers, in June. In August, a joint venture with private equity firm Blackstone bought seven prime shopping centers, and in October, the REIT took full ownership of 30 more power centers that were previously co-owned with Blackstone.

Through its ties with private-equity, the REIT has a lot of experience dealing with major real estate investors. Curiously, Daniel Hurwitz, DDR's chief executive officer, was recently named a director at General Growth Properties. While putting an executive from a possible competitor on the board of directors isn't very common, it seems the move should only be beneficial to DDR.

Based on the company's expected 2013 FFO range of $1.10 to $1.12 per share, DDR shares seem to be priced at a very reasonable 14.5 times given its growth potential.

Looking ahead
REIT shares have been under pressure ever since fears of a Federal Reserve taper have arisen. But retail property owners like General Growth, Pennsylvania Real Estate, and DDR may benefit whether the Fed begins withdrawing stimulus or not. Anxiety in the stock market usually offers buying opportunities. Overly cautious concerns about the effect of interest rates on retail REITs might be just such an event.