The holiday season is the strongest time of year for many retailers, but Evercore ISI analyst Steve Sakwa predicts that this will be a difficult year for retailers. While this thesis is bad news for retailers, Sakwa believes that the weak holiday spending will also have a major impact on mall REITs.
Downgrades
Sakwa sees little impact to funds from operations (FFO) for the class A mall REITs in Q4 or into 2016, but he believes that negative holiday headlines from Macy’s, Inc. M, Nordstrom, Inc. JWN and Gap Inc GPS will produce selling pressure in the mall REIT space.
Evercore has downgraded mall REITs Simon Property Group Inc SPG, General Growth Properties Inc GGP and Taubman Centers, Inc. TCO from Buy to Hold ahead of the holiday season.
Other REIT Groups
Sakwa believes that the apartment REITs will likely be net sellers in 2016, but pointed out that most are in relatively good liquidity positions. Healthcare REITs, on the other hand, will likely spend 2016 moving to de-lever balance sheets and eliminate non-core assets.
For lodging REITs, Sakwa feels that investors remain skittish due to the weak macro environment, and the industry will need to focus on strategies for narrowing the disparity between equity values and net asset values (NAVs). All indications from industrial owners in Q3 point to continuing strength in office/industrial REITs.
“Across The Board” Strength In Storage
Sakwa believes that storage REITs will continue to lead in Q4 and into 2016, and they have demonstrated recent results that were “strong across the board.” Evercore ISI’s top two picks are Buy-rated CubeSmart CUBE and Sovran Self Storage Inc SSS.
Disclosure: The author holds no position in the stocks mentioned.
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