This year has been tough on real estate investors, especially those with exposure to the retail sector. That short-term pain can often cause investors to throw in the towel on a property or their investing thesis. That's evident in the returns from retail REITs, or real estate investment trusts, this year, as the average one has plummeted 28% because many investors abandoned the sector.
However, real estate is notoriously cyclical, so investors need to look past the near-term challenges and see the larger picture. With that in mind, here's a look at what the future might hold for shopping center-focused REIT Retail Opportunity Investments (NYSE: ROIC).
Where Retail Opportunity Investments is today
Retail Opportunity Investments recently concluded its first decade as a public company. It formed in October 2009 with a mission to "acquire, own, lease, reposition, and manage a diverse portfolio of necessity-based retail properties, including, primarily, well-located community and neighborhood shopping centers, anchored by national or regional supermarkets and drugstores...in the eastern and western regions of the United States." The company has acquired seven shopping centers all along the West Coast.
Today, the REIT owns 88 shopping centers with 10.1 million square feet of space. All its properties are on the West Coast, making it the largest pure-play grocery-anchored shopping center REIT focused on that region.
Where Retail Opportunity Investments might be in 10 years
Retail Opportunity Investments' management team has focused on executing the same strategy for 25 years: It only owns grocery-anchored shopping centers along the West Coast. Overall, it has purchased $6 billion of these properties and sold more than $4 billion, primarily via the sale of its first REIT, Pan Pacific Retail Properties, in 2006.
Thanks to that long history, Retail Opportunity Investments has unparalleled West Coast shopping center relationships and market knowledge. It believes it can create the most value for shareholders by leveraging this expertise.
While the company did initially have a broader mandate that covered shopping centers in Eastern regions, it prefers the West Coast because of its strong market fundamentals, which include:
- Densely populated communities.
- Diverse, affluent demographics.
- Above-average household income.
- High barriers to entry.
- Limited new construction.
That's not to say some Eastern markets don't boast those same characteristics. The difference is that the company's management team doesn't have extensive market knowledge and relationships in the East. Thus, it doesn't seem like the company will deviate from its West Coast focus.
Further, it's unlikely the company will move away from grocery-anchored shopping centers, which make up 96% of its portfolio. While it could acquire properties anchored by drugstores or other essential retailers, grocery stores drive consistent traffic to its properties, which benefits other tenants in the shopping center.
Another benefit of these shopping centers is that they're immune to disruption from a recession and e-commerce. That has been evident in 2020 as grocery stores had no problem paying rent. Retail Opportunity Investments collected 98.7% of what it billed during the second quarter and 99.3% in the third. In contrast, other tenants shrugged, evidenced by the overall rates of 81.9% and 88.7%. Because of this, the REIT likely won't buy too many shopping centers that don't have a grocery store anchor, especially as e-commerce continues to steal market share from apparel and general merchandise retailers.
The REIT's West Coast, grocery-anchored strategy had done a decent job creating shareholder value before this year's COVID-19 slump.