How to Measure Asset Qualities for Retail Real Estate Investment Trusts

by Bryan Keythman
A retail real estate investment trust owns malls and retail shopping centers.

A retail real estate investment trust owns malls and retail shopping centers.

A real estate investment trust (REIT) is an investment vehicle that buys investment properties and typically sells shares on a stock exchange. A retail REIT is one that owns and operates malls, shopping centers and other properties where retailers sell products to customers. The quality of a retail REIT’s assets, or properties, varies depending on a variety of factors. A retail REIT with higher-quality assets has the potential to generate stronger profits with less risk. You can measure and analyze a retail REIT’s asset qualities by reviewing its 10-K annual report.

1. Find the section of a retail REIT’s 10-K annual report that lists and discusses the properties that it owns. You can obtain a public REIT’s annual report from either the investor relations section of its website or from the Securities and Exchange Commission’s EDGAR online database.

2. Determine the occupancy level of each property and the occupancy level of its entire portfolio, which is the makeup of all of its properties. Look for properties and a portfolio with higher occupancy levels, which can translate into higher profits. Occupancy levels range from zero to 100 percent, with 100 percent meaning the property is fully rented. For example, a property portfolio with a 90 percent occupancy level typically is higher quality than one with 50 percent occupancy.

3. Identify the major tenants that occupy its properties. Look for properties and a portfolio with a mixture of multiple, nationally recognized tenants. Well-known tenants can increase an asset’s quality by attracting shoppers and other tenants. A portfolio with a mixture of well-known tenants has higher quality and lower risk due to its income coming from many sources.

4. Determine the locations of the REIT’s properties. Properties, such as malls, that are located in major cities have the potential to attract more customers and generate higher rents than properties that are located in secondary cities or rural areas.

5. Determine the class of each property in the REIT’s portfolio. Classes range from A to C, with class A being the highest quality and class C being the lowest. If a REIT doesn’t explicitly state the class of its properties, estimate each property’s class based on its location and age. Class A properties are typically newer, or well-maintained older properties that are located in the best locations near high populations. A portfolio with a higher class of properties has higher quality.

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