Have you ever noticed that despite how bad times get, supermarkets continue to attract long lines of customers? Tenants who occupy space in strip malls next to supermarkets notice this as well. In fact, these days many tenants are bending over backwards in an effort to secure retail space adjacent to the supermarket.
As a landlord, you want secure tenants who will pay you on time. In the commercial space, you want retailers with attractive demographics and strong and steady sales revenue. This is why grocery-anchored retail shopping centers are in such high demand now, as they promote steady foot traffic to the retail stores.
Now imagine if you were a local dry cleaner, restaurant or smoothie bar looking for premium retail space and had the opportunity to gain exposure to a high-density market of more than 100,000 high-income residents within a three mile radius. Best yet, your location would be in the same center with a top grocer such as Whole Foods Market (Nasdaq: WFM) or Trader Joe's. How excited would you be about your business opportunities?
Now, I'm not a business owner, but as an investor I'm still very excited about this scenario. This is because there is a company that's dominating the business of owning, operating and developing grocery-anchored retail shopping centers in the United States.
For 50 years, Regency Realty Corp. (NYSE: REG), a real estate investment trust (REIT), has been known for well-merchandised and maintained centers. As a REIT, Regency has to distribute 90% of its income back to investors. This means when the company thrives, investors cash in with large dividends.
Why the company is thriving
For starters, about 81% of the company's client portfolio includes Whole Foods Market (Nasdaq: WFM), Publix, Safeway (NYSE: SWY), Kroger (NYSE: KR) and Trader Joe's. Because of top names such as these, roughly 1 million shoppers visit a Regency center each year. Grocer sales average nearly $500 per square foot.
The centers are exceptionally maintained and continue to draw consumers. These customers generate repeat visits, helping sales for businesses that share adjacent space.
Regency has also created steady and consistent cash flow. Its tenants sign long-term leases that include regular rent payments, a share of operating expenses and additional fees linked to strong store performance.
With an average of 100,000 potential shoppers averaging about $100,000 in household income within a three-mile radius of its neighborhood shopping centers, Regency's 364 properties are in areas with strong demographics desirable to potential tenants. This has kept its occupancy rate an average of 94% during the past five years. The lease renewal rate is also high at 75% -- an impressive number considering today's tough economic climate.
Because of the tough economic times in 2008, Regency saw some tough times as its tenants were hit hard. After producing 10 consecutive years of growth in same-store net operating income in excess of 2.5%, 2009 came with a 7% decline.
But growth is steadily improving again. The stock is down 30% from its pre-recession peak in 2007 and I think it could return there soon.
Things are trending up for Regency. Take a look at the chart below...
The company reported second-quarter funds from operations -- the measure of cash generated by REITs -- of $61.3 million or 68 cents per share, compared with $55.1 million or 61 cents in the year-earlier quarter. Also, during the reported quarter, same-store net operating income (NOI) excluding termination fees increased 3.6% on a year-over-year basis, with rental rate growth of 2.1% (cash basis for spaces vacant less than 12 months).
With a pickup in the economy, 75% lease-renewal rate, and current 94% occupancy rate, I foresee Regency steadily marching back to its pre-recession peak relatively quickly.
Risks to Consider: The sluggish economy has slowed Regency's development pipeline. During the recession, Regency was forced to take $132 million in impairments related mainly to its developments and land held for future developments. As leases expire, Regency is lowering rent for tenants' new leases. This could put pressure on future cash flows, especially considering that owning and managing retail properties encompasses a host of fixed costs. A reduction in revenue could lead to even greater reductions in profits and cash flows.
Action to Take --> Buy Regency Centers for up to $52 a share. This stock is about 30% undervalued and has tremendous upside along with paying a nearly 4% dividend yield. I see this stock easily hitting $65 a share within the next 12 months.
[Note: A high-quality REIT like Regency is just one of kinds of stocks you'll need to provide consistent, reliable income when it comes time to retire. Whether you're already retired, near retirement, or just getting started, you absolutely need to own what we call Retirement Savings Stocks. Go here to learn more.]