Property Prices Are Improving: Is It Time to Buy REITs?


Source: Ben Schuman.

Property prices are finally on the recovery path. In fact, if you take a look at the S&P Case-Shiller 20 cities index, you'll notice that seasonality-adjusted prices were up 21% in the beginning of this year compared to its lowest point registered in January 2012. This index, which represents a diverse range of homebuyers' participation in the housing bubble, is showing a positive trend that may confirm U.S. a continued rise in property prices.

This is good news for real estate investment trusts, or REITs, which are enjoying a better pricing environment. The rationale is simple: the increasing value of their assets should boost their valuations. So, let's take a look at three companies: Macerich, Regency Centers, and Simon Property Group to see how their businesses are performing.

Profiting from online shopping
Macerich, which focuses primarily on retail properties in California, Arizona, Chicago, New York, and Washington DC areas, presented mixed third-quarter results. Although it showed a 10% increase in adjusted funds from operations, or AFFO, net income dropped 15.2% to $38.1 million compared to the prior-year quarter.

Strategy-wise, the company holds malls located across the most attractive and densely populated markets in the U.S. But its high concentration of Class A malls, which perform relatively better, is what makes Macerich's rents much more stable. Macerich's leading tenants include: Gap, Skechers, and Saks, which are well-capitalized retailers, and well positioned in today's post-recession retail environment. In fact, considering that mall tenant annual sales per square foot have increased 7.4% year over year, the company should continue making solid progress.

Another encouraging decision that Macerich took is its recent deal with Deliv, which will allow the use of some of the company's properties as distribution centers. Essentially it will be using Deliv's technological platform to support same day deliveries. This way, Macerich can start profiting from the growth of online shopping, which is a big deal, since online shopping was reducing sales and traffic to its commercial properties.

Growing despite exposure
Regency Centers is the preeminent national shopping center in the country, and it performed well in 2013. In fact, the company made improvements throughout 2013 that led to a net Income of $129 million, compared to a net loss of $7 million in 2012.

The company's objective is to spread its footprint in high-income and high-barrier markets. In order to accomplish this, Regency is executing a long-term overall portfolio restructuring, which involves holding infill locations with high-occupancy levels.

Regency holds leading grocers such as Kroger and Publix as tenants, which reduces volatility to its portfolio and mitigates operating risks. The company generally enters into long-term leases, protecting it from market corrections. This strategy has allowed Regency to surpass its peers in terms of shareholder value growth and compounding total shareholder returns. However, 48% of its assets are located in California, Florida, and Texas, which exposes Regency to market saturation.

Source: Flickr / Nicholas Eckhart.

Less exposed
Finally, there's Simon Property Group, a REIT with assets in almost all retail distribution channels. Driven by revenue and occupancy gains, the company posted strong results for its fourth quarter. For the whole year, Simon's funds from operations grew 10.9% to $3 billion -- an impressive level of growth.

Compared to Regency, Simon Property has a higher international presence, which gives it more long-term sustainable growth prospects. By having an ownership stake in Klepierre, it is becoming easier for the company to expand its global footprint, accessing the high barrier-to-entry European markets. In the third quarter, Simon Property completed the acquisition of its interest in McArthurGlen's European designer outlet business, allowing its international business to contribute 7.9% of the company's net operating income.

Final thoughts
Regarding Macerich, the location and type of assets that it holds makes it an interesting investment. Plus, its deal with Deliv will add a larger customer base and help the company profit from online shopping, reversing a clear trend that affects REITs' overall business.

Regency remains well-positioned, and its relative geographic concentration and tenant base has worked well. However, a higher diversification of assets could reduce its exposure to a new property market price correction.

Both product and geographic diversification are Simon Property's biggest characteristics, which provide better insulation against market volatility, and help it achieve a consistent performance. Ultimately, this company should capitalize from improving market dynamics, as it did during 2013.

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