The average real estate investment trust, or REIT, using Vanguard Real Estate ETF as a proxy, is up 15% from where it started out in 2020, before the coronavirus started to spread. However, Simon Property Group (NYSE: SPG) and Ventas (NYSE: VTR) are still down around 10% and 5%, respectively. Both were hit particularly hard by the pandemic, but as we continue to move through 2021, investors should take a closer look at their recovering businesses. This fall could be a good opportunity to buy in.
Rewarding investors again
Simon is one of the largest mall owners in the world, with over 200 enclosed malls and outlet centers in its portfolio. This has not been an easy business, with the retail apocalypse making life tough before the pandemic and the coronavirus basically shutting malls down entirely for a prolonged period of time. Malls have been closing, and a number of mall REITs have gone bankrupt. Simon, which has a large, generally well-positioned portfolio, is still standing.
Part of the reason for that is its sector-leading financial strength, which allowed it to weather these dual storms in relative stride. Another positive is the fact that Simon actually used this period to strengthen its industry position via strategic investments, including acquiring a peer and buying, with partners, iconic retailers.
The success of these efforts is highlighted by the fact that the REIT has increased its dividend twice so far in 2021. Yes, it cut the disbursement roughly 40% in 2020, but that it has so quickly returned to dividend growth is a testament to its strength.
And yet the real reason to like Simon is longer-term in nature. The mall space is going through a trying period of change, with weak malls likely to shut down and get repurposed. That's the glass-half-empty view of things. The glass-half-full side is that the mall REITs that survive this shakeout are likely to end up even better positioned than they were before.
Simon looks like a survivor, and given its moves during the downturn, it's set to see two tailwinds as consumers return to the malls that are still standing when the dust settles. With a relatively generous 4.5% dividend yield (Vanguard Real Estate ETF yields just 2.3%), and growing payment, now is the time to dig in -- before more investors catch on to the REIT's inherent advantages.
Acting on early signs of strength
Ventas is one of the largest, most diversified healthcare REITs you can buy. That said, it has a sizable SHOP portfolio, which is industry lingo for properties it both owns and operates. At around 26% of net operating income, this segment of the company's senior housing business was hit particularly hard in 2020.
That's because property-level performance flows right through to the REIT's top and bottom lines. During the early stages of the pandemic, occupancy fell, costs rose, and new customers held off on making living decisions. Ventas cut its dividend nearly 45%.
While Ventas hasn't started to increase its dividend again like Simon has, it did ink a deal to buy a senior housing peer with a focus on SHOP assets. In other words, it's doubling down on the part of its business that has caused it the most problems. After being completed, SHOP is expected to account for 31% of net operating income.
Why would Ventas do this? Easy! The senior housing business has strong long-term demographic tailwinds that have not changed and -- this is the big one -- the REIT is seeing the early signs of a rebound in its SHOP business. The acquisition target, New Senior Investment Group, is seeing similar strength in its business, too.
What's really interesting here is the leverage inherent in the SHOP model. Yes, it stung on the way down, but as the SHOP business improves, the recovery will also flow right through to Ventas' top and bottom lines, juicing performance. And with the New Senior acquisition, the benefit will be even larger as Ventas comes out of this industry downturn.
The yield here is roughly 3.2%, not quite as attractive as Simon's yield. But once Ventas' SHOP portfolio gets back on track, investors should probably be expecting dividend hikes. The time to act is now, while the green shoots are just starting to show.
Risk and reward
It would be a lie to suggest that Simon or Ventas are risk-free investments, especially since the world still hasn't figured out how to live with the coronavirus. However, given their solid businesses and improving prospects, the risk/reward balance seems fairly attractive. That's doubly so since investors still appear to be downbeat on the shares relative to the average REIT. Acting this fall, while other investors are still focusing on the negatives, could be a good long-term call.