The Amazon Effect And REITS

This one doesn't need much interpretation: The decline ytd is down close to 25%

....But here is one nonetheless. Some analysts see a differential between mass market and high end malls.

U.S. shopping mall REITs hurt by department store woes

NEW YORK (Reuters) - After a spate of disappointing quarterly results from big-name retailers, mall real estate investment trusts (REITs) have come under pressure.

The FTSE NAREIT regional mall index .FTFN22 is on track for its second straight month of declines, after department store operators such as Macy's (M.N) and Nordstrom (JWN.N) reported disappointing earnings and soft monthly sales results, raising concerns about possible store closings.

High-end malls, where names such as Nordstrom serve as an anchor, are considered more resistant to department store closings as they are able to attract new occupants often paying higher rents. A glut of store closings at lower-end malls could prove more problematic for REITs that own them.

"It wouldn’t be surprising if high-end malls ended up with two traditional department stores compared to the roughly four traditional department stores currently at most malls," said Cedrik Lachance, Director of U.S. REIT Research at real estate research firm Green Street Advisors in Newport Beach, California.

"The high-end mall still has a lot to offer to retailers and customers, but many lower-end properties will face sizable challenges in the coming decade and could garner a disproportionate share of headlines.

And there are some contrarians:

The analyst in a June 29 Forbes article gives a positive view on several REITS that contain more luxury stores such as Simon Properties...but discloses he has a financial interest in all of those he mentions.

What about those REIT ETFs?

While there are no REITS that specifically concentrate on the shopping mall sector, the largest REIT etf has 19.8% of its holdings in retail ETFs --the largest sector of its holdings

VNQ has helped up relatively well  (see  5 year chart) YTD it has way undeperformed the S+P 500 (2.1% vs 10.8%). REITS are often seen as a substitute for bonds, the ishares investment grade bond indes ETF (LQD) is up 5% ytd.

 Simon Property as its largest holding and as an owner of luxury malls is often cited as a company that will stand up to the "Amazon effect".

At least for now the market has "voted" negatively:

A bad omen for broader REIT etfs ? Predictions are difficult to make but if the Amazon effect" impact includes luxury retailers it bodes particularly negatively for prospects for VNQ.

 I am no expert but there only a limited number of high end department stores like Nordstroms , a limited population for customers and even Nordstroms is moving on line. And the often cited Apple store and Tesla showroom do not represent a large  prospective segment. That leaves a limited number of small luxury retailers movie theatres(suffering more and more from the "netflix" effect) and food courts and restaurants..and kiosks to return items purchased online. ...and lots of non income producing square footage in the parking structures.  Not exactly a long term positive outlook.

In the quest for yield in a low interest rate environment many investors (including professional advisors) have recommended REITS. With the yield on VNQ at 4.4% and the yield on LQD at 3.18% it is hard for me to think the extra risk is worth the additional yield. Remember that REITS are required to pay out 90% of their earnings as dividends meaning the payouts from REITs could be far more volatile than investment grade bonds.

Reits (VNQ) has returned +1.4% in the past 12 months vs +1.4% for IEF the intermediate corproate bond ETF(IEF)

Corporate Bonds (IEF) Blue
 REITs (VNQ) green

Robo Advisor Alert: Wealthfront includes an allocation to REITs