It's been a rough ride for many retail stocks in 2016, as the sector has wrestled with declining sales, store closings and a few bankruptcies. Yet, real estate investment trusts that own certain retail properties - in particular, the free-standing stores - have soared to record highs this year, with year-to-date total returns averaging more than 34%. And experts say the REITs run may not be over yet, although profit-taking and fears of interest rate hikes could pose headwinds.
Retail stocks have been in a funk, as big-name retail chains, such as Macy's (M) , reported falling sales, weak earnings projections, and plans for more store closings. Bankruptcy filings from such retailers as Aeropostale, Pacific Sunwear of California and Sports Authority, added to the angst. And disappointing retail sales data from the Department of Commerce in July fueled investor fears further.
But the retail sales turmoil has little - if any - impact on REITs that own free-standing retail properties.
Retailers signed long-term leases, which obligate them to make fixed rental payments to the REITs in good economic times and bad. "And the leases are very very long - often 20 years in length," said Rich Moore, a managing director at RBC Capital Markets.
If a retailer decides to close a store, it's still required to make rent payments to the REIT. "Retailers can't just walk away from their leases," said Moore.
The exception, of course, is if a retailer files for bankruptcy protection. If this happens, then the REIT is stuck with an empty property with no rent coming in until a replacement tenant can be found.