NEW YORK (TheStreet) -- Real estate investment trusts that specifically invest in the retail sector have been challenged -- to say the least -- not only from lower overall consumer spending of late, but online shopping continues to threaten brick-and-mortar stores. Yet, there are still sound investments in the retail REIT sector.
Retail REITs invest in shopping centers, malls, convenience stores and retail chains.
Investors generally like REITs for their strong dividend income, among other factors, as REITs are required to pay out at least 90% of their income in the form of dividends to investors each year.
One potential boost to the retail REIT sector is the transformation of stores as separate from their online counterparts. It's a growing strategy called omni-channel shopping and combines both online and in-store experiences to allow the customer to purchase how and when she wants. Retail chains like Apple (AAPL) and Macy's (M) are forging ahead with so-called omni-channel shopping strategies, and that could benefit retail REITs, wrote Bank of America Merrill Lynch analyst Jeffrey Spector in a note to clients in December.
"For retail REITs with dominant assets, omni-channel retailing has created significant demand for flagship stores helping these landlords push rents. We expect this to continue in 2015, as BofAML's retail team believes we are entering the next phase, with retailers optimizing omni-channel efforts," the note said.
So, which ones should investors add to their portfolios? Here's five to consider. The stocks on this list are all buy-rated stocks in the Retail REITs sub-industry. And when you're done be sure to check out the nine office REITs to buy.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on June 2, 2015 closing prices.ADC data by YCharts
1. Agree Realty Corp. (ADC)
Market Cap: $530 million
Annual Dividend Yield: 5.88%
Year-to-date return: -1.9%
Agree Realty Corporation, a real estate investment trust (REIT), engages in the ownership, development, acquisition, and management of retail properties, which are primarily leased to national and regional retail companies in the United States.
TheStreet Ratings: Buy, B
TheStreet Ratings said: "We rate AGREE REALTY CORP (ADC) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, good cash flow from operations, increase in net income and growth in earnings per share. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 8.5%. Since the same quarter one year prior, revenues rose by 25.2%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The gross profit margin for AGREE REALTY CORP is rather high; currently it is at 57.72%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 40.44% significantly outperformed against the industry average.
- Net operating cash flow has increased to $9.01 million or 10.23% when compared to the same quarter last year. In addition, AGREE REALTY CORP has also modestly surpassed the industry average cash flow growth rate of 0.73%.
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Real Estate Investment Trusts (REITs) industry average. The net income increased by 18.3% when compared to the same quarter one year prior, going from $5.38 million to $6.37 million.
- AGREE REALTY CORP's earnings per share improvement from the most recent quarter was slightly positive. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AGREE REALTY CORP reported lower earnings of $1.23 versus $1.41 in the prior year. This year, the market expects an improvement in earnings ($1.54 versus $1.23).
- You can view the full analysis from the report here: ADC Ratings Report