Avoid (This) Stock Like the Plague
Want passive income, but not the headaches of direct real estate ownership? Buy real estate investment trusts. However, not all REITs are the same and some should be avoided at all costs.
source: created by the author with Microsoft Copilot
As discussed in my last article, the REIT market is vast and versatile with over 1,000 REITs worldwide, and not all of them are equally attractive.
They invest in 30+ countries and 20+ different property sectors and some are facing significant headwinds, all while others enjoy rapidly growing rents. Moreover, there are also vast differences in valuations from one sector to another.
In this article, I am going to highlight another type of REIT that I would avoid investing in this year.
Retail REITs
I own a few retail REITs so it is not my contention that you should immediately sell them.
Unlike office REITs, retail REITs have been performing fairly well and enjoying strong fundamentals.
But the issue with retail REITs is that this is now mostly priced in.
They have enjoyed an impressive rally over the past year and as a result, they now trade at historically expensive valuations.
Togive you an example, the outlet center REIT Tanger (SKT) currently trades at 17x FFO, but outlet centers are not exactly a growth sector. On the contrary, I fear that they will suffer over the long run from the continued growth of Amazon (AMZN) and discount retailers like T.J. Maxx (TJX).
Outlet centers used to stand out by promising the best prices, and consumers were willing to drive even longer distances to get to the closest outlet once in a while.
In this day and age of same-day shipping, simply competing on prices just isn’t enough anymore And plenty of discount retailers are now available in the more convenient locations of open-air neighborhood strip centers.
And to be clear, it is not just Tanger and its outlets. A lot of retail REITs are pricey today.
Already, Tanger is down 11.81% year to date, with most of its damage occurring since the announcement of tariffs at the beginning of April of this year.
The Tariff Cloud
The tariffs that were announced by the president several weeks ago have created an enormous cloud over all businesses, but retail in particular. In just the last week alone we’ve read reports that Amazon was considering breaking out the tariff costs, listing them on each of its online offerings so consumers would be aware of the great impact they were generating on costs.
Target has said it is looking for some of its suppliers to eat some of the costs owing to tariffs, but will still have to raise some prices, nevertheless.
Mattel, the giant toy maker has announced it will have to raise prices across all of its toy segments. Of course, this translates to an increase in prices across all retail sectors.
Your Takeaway
When prices rise on consumer goods, consumers have less to spend on other items. As this phenomenon cascades across the economy, retail REITs will begin to show the strain. As landlords to the retail space, when retailers begin to struggle under the weight of this burden, some will begin to fall behind on rent payments. Others will begin to demand decreases in rent payments. REITs that rent to them will therefore have less income per share to distribute to shareholders. This is the crux of the argument and why, at this time, I council caution to investors contemplating investing dollars into this sector.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am long all RODAT Portfolio names. The Portfolio continues to build dividend income with reliable, dependable equities which have long histories of increasing the dividend. RODAT Subscribers that have mirrored this portfolio currently have over $139,000.00 in annual dividend income.