The internet has had a huge influence on how we live our lives, perhaps nowhere more than how we buy things. The growth in online shopping has been staggering, and online retailers such as Amazon.com Inc. (AMZN) continue to claim an increasing share of shoppers' dollars. That’s prompted many analysts to proclaim that traditional “bricks and mortar” shopping was going the way of the dodo.
Well, those analysts may want to think again.
A new study, shows that the traditional shopping experience is alive and well for many Americans. Physical retail spaces aren’t going away. In fact, they are thriving. With that in mind, investors may want consider adding the owners of these retail locations to their portfolios.
Bricks and Mortar: Alive and Kicking
According to new study by global consulting firm A.T. Kearney, consumers continue to flock to physical retail locations and are actually crucial in generating online sales for retailers (see showrooming). By a wide margin, bricks and mortar remains the preferred channel for shoppers. (For related reading, see: How Wal-Mart Makes Its Money.)
That’s a sharp contrast to what many analysts and investors have predicted.
According to the study, 90% of all U.S. retail sales conducted last year were done in a physical store versus only about 9% done online. What’s more, 95% of all sales were accounted for by retailers with a bricks and mortar presence. A.T. Kearney found that just over two-thirds of customers purchasing online used a physical store before or after the transaction. Kearney noted that stores make a significant contribution to generating sales, even if the transaction is eventually done online. Through the five stages of a retail transaction — Discovery, Trial & Test, Purchase, Delivery or Pickup, and Returns — at some point along the chain, the majority of consumers will use a physical store.
The study can only serve as bullish news for those owners retail-focused real estate structured as real estate investment trusts (REITs).
Much has been published about the death of shopping malls, power centers and free-standing retail locations at the hand of online shopping and websites like eBay Inc. (EBAY). The owners of the these retail locations probably don't have a lot to fear, though, as they should continue to power portfolios with strong dividends and capital gains for years to come.
Buying Some Retail REIT Muscle
Given that physical stores still remain an important part of the American shopping experience, investors may want to give them a prime spot in their portfolios. While most broad REIT funds like the Vanguard REIT Index ETF (VNQ) do include exposure to retail real estate, the iShares FTSE NAREIT Retail ETF (RTL) is more of a direct bet.
RTL tracks 35 different power center, shopping mall and outlet centers owners. Top holdings include giants like Simon Property Group Inc. (SPG) and Kimco Realty Corp. (KIM). Overall, the ETF is proof that Americans still love to go out to shop, with RTL returning around 25% annual over the last five years. Expenses for the ETF run 0.48% and RTL yields a healthy 3.25%.
The only drawback to RTL is that the fund features very low trading volumes. To that end, investors may want to consider other individual options. (For related reading, see: How to Assess a Real Estate Investment Trust.)
Don't Forget Small Malls
One could be in smaller mall operators. While Simon is the largest owner, smaller firms like CBL & Associates Properties Inc. (CBL), Macerich Co. (MAC) and General Growth Properties Inc. (GGP) have all experienced faster funds-from-operations (FFO) growth than their bigger rival. That often-touted REIT metric directly puts cash back into investor’s hands as dividends. In fact, both CBL & GGP saw FFO growth of nearly 12% this quarter.
Another great choice could the owners of freestanding retail properties. Often these properties are triple-net leased, meaning all the resulting costs of ownership are passed down towards the tenant, leaving the property owner to sit back and collect rent. Realty Income Corp. (O) continues to be one of the best performers in the sector and has a 45-year track record of paying dividends. O currently yields 4.9%.
Finally, traditional grocery store-anchored real estate and neighborhood shopping centers continue to pack in customers, with DDR Corp. (DDR) leading the way. The firm continues to expand by buying assets from other developers, including private equity firms looking to raise cash. That strategy seems to be working as DDR has realized higher occupancy rates as well as FFO measures.
The Bottom Line
Bricks and mortar stores aren’t dead or even dying. Not by a long shot. For investors, that means the owners of shopping malls, power centers and other retail real estate are in a prime position to continue paying strong dividends for years to come. (For related reading, see: 5 Types of REITs and How to Invest in Them.)