One of the most persistent characteristics of the economy over the past couple of years has been the extremely robust labor market. Unemployment is close to record lows, and workers (particularly at the lower end of the wage scale) are seeing solid salary growth. According to payroll processing firm ADP, workers saw 6.9% annual wage gains in March 2023.
Strong wage growth and increasing consumer spending tend to go hand-in-hand. While there are fears of a recession as the Fed raises interest rates, the consumer seems healthy. As long as consumer spending holds up, retail-focused real estate investment trusts (REITs) should perform well. Here are two retail REITs that investors may want to consider picking up in April.
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Simon Property is one of the best shopping mall operators
Simon Property Group (SPG +0.81%) owns and operates premium retail-focused REITs. As of the end of 2022, the company owned or operated 196 properties, including 95 malls, 69 premium outlets, and various other properties. The company also owns an 80% stake in Taubman Centers and has a holding in European mall operator Kleppiere.
Retail REITs saw occupancy fall as a result of the pandemic, and the recovery is still a work in progress. In 2022, occupancy recovered from 93.4% to 94.9%, just below the pre-pandemic level of 95.1%. Despite the Fed's tightening cycle in 2022, sales per square foot hit a record $753 at the end of 2022.
Simon Property is guiding for 2023 funds from operations (FFO) per share to come in between $11.70 and $11.95 per share, putting the stock on a multiple of 9.3 times 2023 FFO per share, which is attractive. The stock also has a 6.6% dividend yield, and the dividend of $7.20 per share is easily covered by an estimated FFO per share. Simon is one of the best-run retail REITs in the U.S. and should continue to perform well.
Kimco is a more defensive play among retail REITs
Kimco Realty (KIM +0.43%) is the leading operator of open-air supermarket-centered shopping centers. At the end of 2022, Kimco had interests in 532 shopping centers comprising 90.8 million square feet of gross leasable area primarily in coastal markets and the Sun Belt.
The company's shopping centers are typically anchored by a supermarket, home improvement store, off-price retailer, or discounter. The company's biggest tenants include TJX Companies, which owns Marshalls and TJ Maxx, Home Depot, Ross Stores, and Albertsons. Yet the biggest tenant, TJX, accounts for only 3.7% of gross rent, meaning Kimco has a relatively well-diversified portfolio of tenants.
Kimco's portfolio is relatively defensive. Even if the U.S. ends up in a recession, discount retailers will outperform luxury, and grocery stores account for a lot of consumer non-discretionary spending. Kimco is benefiting from a change in how retailers look at e-commerce. Retailers are learning that the buy online, pick up in store business model saves a lot on shipping costs and also benefits from impulse discretionary spending in the store.
Since the Great Recession, the U.S. has seen a collapse in new retail center construction, driving both occupancy rates and rents higher. Kimco is guiding for 2023 FFO per share to come in between $1.53 and $1.57. This gives Kimco a multiple of 12.3 times guided FFO per share.
Kimco pays an annual dividend of $0.92, so the dividend is well-covered by FFO per share. This gives the stock an attractive dividend yield of 4.8%. Kimco is a bit more defensive than Simon and should perform well even if the U.S. heads into a recession.
