Here's what I can't figure out.
In the last week I have spoken with the CEOs of Federal Realty (FRT) , the largest shopping center owner, Tanger Factory Outlet Center (SKT) , the largest off-price mall owner and Kimco Realty (KIM) , the largest open-air, or strip mall, owner.
They all have three things in common.
First, when an older tenant goes out of business it's good news or even great news. Kimco has some 20-year leases with Kmart that are about to start coming up. Look out above for that rental rate when Kmart wraps things up. Tanger is able to re-tenant -- as they call it -- at a much higher price. Almost all of Tanger's original clients have gone under. No matter. There are always new retailers who want their space.
Second, despite Amazon (AMZN) none of these three REITs have seen much pressure at all from the online colossus. Kimco CEO Conor Flynn told me that most of his tenants have businesses that are not easily compromised by Amazon. One of the fastest-growing clients is Ulta Salon (ULTA) , the classic non-Amazonable retailer because you can't get your hair done online. Sure, you can order the cosmetics and shampoos online, but Ulta's price competitive and often it's easier just to go, even as Ulta's omnichannel is among the strongest in retail. Flynn also called out the pet business as one that Amazon can't compete with. Of course Amazon's a place to get pet food, for certain. But the pets themselves? You have to go to the store.
Kimco and Federal often have the highest-end grocery stores as anchor tenants. Yes, again, Amazon is trying to get into all sorts of grocery like initiatives. But Kimco would tell you that the supermarkets know how much you want to look at the merchandise and if you don't it is easier to text ahead and pick up through a drive through, which is the supermarket of the future.
Third, and perhaps most ironic, despite rental rates being incredibly tight, despite almost full occupancy, despite the dearth of big bankruptcies -- only Sports Authority comes to mind of the big ones -- there is an amazing lack of new construction everywhere. Shopping malls, outlet centers and strip malls are all in short supply.
In fact, the reason why these are excellent stocks is a lack of supply that makes it so rents can always go up when a tenant goes belly-up or moves on.
Now, here's what's most amazing about that.
This has been going on for year and years. The lack of new construction is just astonishing. Anecdotally you get the impression that there simply isn't enough good real estate left to develop adjacent heavily-trafficked areas. Both Kimco's Flynn and Federal Realty's Don Wood emphasize the need to be convenient and to offer values as a way to stay a viable tenant.
I am thinking that the convenient spots are almost all taken or are zoned out simply because there is ample development money and ample developers and ample labor to make it happen.
The fact it isn't has more to do at this point in the cycle, structural issues that aren't going away, much more than cyclical issues that easy money should have cured.
Scarcity is the key. And I think it can remain the key until whole new areas are built out and new malls and strips are needed.
Right now we are not getting that kind of household growth to warrant that kind of development. So, these entrenched players just keep winning and winning even as you would think they, theoretically, would be among the best shorts in the world.
