Being a giant real estate investment trust (REIT) has its advantages, but don't discount relatively small names like RPT Realty (NYSE: RPT) and Retail Properties of America (NYSE: RPAI). Why? Because small companies often grow more easily than larger ones.
These two retail-focused REITs' vastly different plans are beginning to take shape. Here's a look at what potential investors need to know.
Big or small
Before getting into the growth stories, it's worth examining the scale issue here. Both RPT Realty and Retail Properties of America focus on owning shopping centers. RPT Realty's market cap is roughly $1 billion while Retail Properties of America weighs in at around $2.5 billion.
This puts RPT Realty and Retail Properties of America on the small side of this REIT niche. By comparison, Federal Realty and Kimco Realty, two of the largest names in the sector, both have market capitalizations that come to just a touch over $9 billion.
Although there are definite benefits to being large, such as notably easier access to capital, being large also has its limitations; for instance, it takes more to move the top and bottom lines. This is why more intrepid investors often gravitate to smaller companies focusing on growth.
And that's likely to be the big attraction with RPT Realty and Retail Properties of America, noting that their dividend yields are on the modest side at 2.3% and 2.6%, respectively. For reference, Federal Realty and Kimco Realty offer yields of 3.6% and 3.2%, respectively.
In other words, if you're looking for shopping center REITs offering generous yields, you probably wouldn't be interested in either RPT Realty or Retail Properties of America. However, if you're searching for smaller names with greater growth potential, you might just find one of these two REITs attractive. But there are important nuances to note here.
With a portfolio of just around 50 properties, RPT Realty is the smaller name by far. About two-thirds of its assets have a grocery store in them, which is generally considered a positive because customers tend to visit repeatedly. The REIT's portfolio is spread across a number of states, with no particular geographic focus to speak of.
Right now, RPT Realty is working on three growth opportunities. The first is simple: Grow the owned portfolio via additional acquisitions. The next two involve managing joint ventures that invest in retail properties, the first being a partnership with a foreign investor that will buy shopping centers. RPT Realty owns 51.5% of the joint venture, and there is material overlap with its owned portfolio that should be monitored.
RPT Realty owns just 6.4% of the second joint venture, which focuses on single-tenant net lease assets. The company is looking to partition some of its existing properties to create net lease assets to sell into this partnership. This plan will allow it to raise cash for its owned portfolio without needing to tap the capital markets -- an interesting capital-raising move indeed.
Both joint ventures allow RPT Realty to leverage its employees to generate fees from outside investors. While it's too early to tell whether these efforts will be successful, RPT Realty has basically created three levers for future growth.
Building from within
Retail Properties of America's 100 or so properties are also about two-thirds grocery-anchored, with just shy of half of its rents coming from the Sun Belt region and the rest being tied to major U.S. cities. However, its business is far more traditional in nature.
Basically, this REIT is looking to contractual rental increases and portfolio expansion to grow its business. But there's a bit more to the story than that.
The company is currently working on four internal projects that will enhance the assets it already owns. This built-in growth includes not only upgrading retail properties but also adding things like office space and apartments to create mixed-use assets. In doing so, the REIT hopes to achieve investment returns as high as 15% on these projects.
To be fair, construction is always a slightly risky undertaking, given the high number of variables involved. For example, because of rising construction costs, returns might not be as good as expected, and timing may not play out as planned.
However, there is a very clear runway here since the properties are already in the portfolio. And assuming things go reasonably well, Retail Properties of America will likely look to add more projects to the pipeline.
Which is the better REIT?
There's no real definitive answer as to which of these two REITs will be the better investment option. RPT Realty's partnership approach spreads the risk to some degree, but there could be overlapping loyalties and, perhaps, some distraction involved. As a result, investors will want to pay pretty close attention to what's going on at each of the three different pieces here.
Retail Properties of America, on the other hand, is less complicated. However, given the importance of the internal development projects, investors will want to keep a close eye on the construction progress.
In other words, these are not set-it-and-forget-it-type investments. More conservative investors who don't want an extremely active role in their portfolios will probably want to avoid them in favor of industry stalwarts like Federal Realty and Kimco Realty.
For more aggressive investors who enjoy closely monitoring their holdings, however, both could be attractive. Retail Properties of America, however, is the less complicated of the pair -- and that's notable, given that joint ventures can sometimes be a bit opaque, making it hard to get a good handle on what's happening.
On the other hand, joint ventures are crucial to RPT Realty's future, suggesting that this REIT is really only appropriate for investors who are willing to take on some additional uncertainties. In other words, Retail Properties of America will likely be the best fit for most investors currently comparing these two REITs.