How To Select Exceptional Retail REITs

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Transcript from the popular REITs online course
Lecture: How to Select Exceptional Retail REITs

According to the A.L.M. framework, we first have to analyse the kind of assets that an exceptional retail REIT will hold, and such REITs usually hold shopping centers and strip malls that are “Target Market Centric”.

What do I mean by ‘Target Market Centric’? 
For instance, if the mall is located near suburban places, the mall should have anchor tenants like Walmart, McDonald’s, essential drug stalls and clothing stalls similar to GAP that suit the area’s budget, needs and wants.
If the mall is located near areas of business, then the REIT should have brought in a variety of restaurants such as Outback Steakhouse, Olive Garden, and Starbucks; bring in business-oriented clothing stalls like Mark & Spencer, have entertainment outlets, stationary shops, money changers and so forth. You get the gist.
Ask yourself this, does the retail REIT you are looking at have malls that are positioned in such a way that meets the needs and expectations of the people in the area?
The easiest way to know this is to visit the malls yourself or obtain feedback online, which is pretty easy to do.

Exceptional REITs also tend to also have integrated malls in their portfolio. Integrated malls are real estate properties that are intelligently combined with other types of buildings, such that both the buildings and their businesses complement each other and, as a result, become magnets to draw in more people.

Let’s look at this example, this building called Carino Esaka; owned by Kenedix Retail REIT Corp, located in Osaka, Japan.
Carino Esaka is a multi-use shopping complex that combines both shopping centres on its lower floors and a hotel on its upper floors. The hotel guests get to enjoy the convenience of having a shopping centre at their doorstep, whereas the retail tenants get continued foot traffic from these hotel guests even during weekdays.  As such, it is no surprise to find that the occupancy of its retail malls has remained close to 100%.

So this is what an integrated mall looks like. And especially in Japan where convenience, ease of access and efficiency are held in high regard, I believe malls such as Carino Esaka will continue to do well for their investors in the foreseeable future.
Other than malls that are made target market centric, exceptional retail REITs may have integrated malls in their property portfolio as well, so do look out for them.  
RIGHT – moving on to…

Location pointers.  
An exceptional retail REIT will have its malls located in areas where there is a “sizeable population of affluent people”. This is an important point for which you need to perform due diligence.
You want to ensure that the retail REIT you are looking at does not have malls that are located in questionable areas – and by ‘questionable areas’, I mean places with nauseatingly high crime and vandalism rates. You know – the areas that give a looming sense of unease whenever you walk along the street.
Malls in such places, even if they are brand new, usually do not do well – their tenants will find it hard to draw in customers and will eventually close.
I always practice the habit of looking through the retail REIT’s property portfolio thoroughly. If I see malls located in far-flung places that are unfamiliar to me, I will acquire feedback and get a sense of the area’s popularity and level of affluence.
Ideally, the property should also be located in an area with a large catchment of households or an area with the potential for new growth, such as a new town. So please do this if you are looking at buying into a retail REIT.

The next location pointer is about “Accessibility”.
Exceptional retail REITs will ensure that their malls are highly accessible, where patrons can come via train, buses or taxis. The logic here is this; when you make it easy for people travel to your malls without much consideration and cost, your tenants will continue to enjoy high foot traffic and they will be more willing to pay higher rental rates when their leases are up for renewal.
Some exceptional REITs will even build walkways and underground passages linking to other shopping malls and stations so as to improve connectivity and bring greater convenience to patrons.
For instance, this retail REIT called CapitaMall Trust. You can take a look at how they strategically divert traffic into its malls.

All right – now let’s look at the management side of things. What do the people in the management do to make a retail REIT different from the rest?
Whenever I read a REIT’s annual report, they would usually use the word ‘proactive’ to describe their management team.

Of course, in any investment; we would want proactive people to manage our money.
But what does it actually mean to be “proactive”, or have a “proactive” management?
To me, my definition of “proactive” simply means continuing to find ways and means to sustain and improve investment returns.

Applying this to retail REITs, we know that foot traffic determines the success of any retail REIT- Therefore organizing events, holding competitions and establishing celebrity meet & greets are some of the many ways management can do to increase foot traffic. An exceptional retail REIT will show signs of being proactive in spearheading marketing and publicity to make sure their malls remain relevant and fresh to their target markets.
Suntec Real Estate Investment Trust is a brilliant illustration. Look at how the management manages Suntec City.  You will see countless events that have been organized and initiated by the management –  a clear sign of an exceptional REIT.

Another sign of good management initiatives is the practice of AEIs.
AEI stands for Asset Enhancement Initiative, which is basically to further enhance the shopping experience for their target markets by changing the physical appearance and the innards of the malls.
Increasing the number of outlet stores,

Converting unused spaces or,
Subdividing some of the anchor tenant spaces into smaller units to extract higher per-square-foot rentals are some examples of AEIs.
The management of exceptional retail REITs usually has a track record of doing ALL OF THESE.
Those malls that the management don’t do AEIs on, they will sell off to other parties and use the proceeds to buy other promising malls. For that reason, do look for this pattern of excellence as well.
Right… this is a criteria checklist of what we have gone through in order to cherry-pick retail REITs.
Note that EACH type of REIT is unique and each deserves its own A.L.M. criteria, so for the subsequent lectures you will see a criteria checklist done for you at the end of each lecture.    
You can use or modify the checklist to run through the REIT that you have selected and see whether they have fulfilled the points in the criteria. The more your selected REIT has fulfilled the list of points in the checklist, the more likely IT IS an exceptional REIT.

Excellent! In the next lecture, we will use the A.L.M. framework on hospitality REITs.

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