Real estate was one of the most impacted sectors of the stock market as the COVID-19 pandemic hit, and not surprisingly, retail REITs, or real estate investment trusts, were hit especially hard. Most nonessential businesses in the United States were forced to close at the onset of the pandemic, and even now many are largely forced to operate with capacity limitations in place.
However, the rollout of several safe, effective vaccines has given investors light at the end of the tunnel, and brighter days could be ahead for well-run retail REITs. Here are two in particular I own in my portfolio that could be especially smart choices for patient long-term investors.
A profitable REIT with top-notch leadership
To be fair, the COVID-19 pandemic hit Tanger Factory Outlet Centers' (NYSE: SKT) business hard. Not only were all of its tenants forced to close as the outbreak started, but some of Tanger's largest tenants ended up going bankrupt. Ascena Brands (parent of Loft), J. Crew, and Brooks Brothers are just a few examples. As a result, occupancy at Tanger's outlet properties fell from 97% at the end of 2019 to less than 92% at the end of 2020.
However, there are some reasons to be optimistic. For one thing, Tanger is still quite profitable and recently decided to start paying dividends once again. And the company has made some significant progress when it comes to re-leasing vacant space, especially when it comes to larger-scale merchants that could take up more square footage.
For example, Dick's Sporting Goods (NYSE: DKS) recently opened a large outlet store in one of Tanger's outlet malls in New York. And as an encouraging sign for the outlet industry in general, Tanger reported that customer traffic at its properties was at 96% of pre-pandemic levels in January.
I'm also a big fan of some of the moves new CEO Stephen Yalof is making. Just recently, Yalof decided to take advantage of the rapid rise in Tanger's stock price to sell about $130 million in new shares to help strengthen the company's balance sheet and financial flexibility. And with nearly $800 million in liquidity, I'm excited to see what opportunities Tanger pursues in the post-pandemic world.
The biggest and best mall operator in the world
Simon Property Group (NYSE: SPG) is the largest mall operator in the world, with a massive portfolio of high-end shopping malls (many under The Mills brand name) as well as a dominant share of the outlet industry through its Premium Outlets brand.
And Simon's properties aren't just malls. The company has been gradually adding non-retail elements like hotels, entertainment venues, high-end dining establishments, and more to its properties to create destinations. This helps to insulate Simon's properties from e-commerce headwinds and keeps customer traffic high.
In fact, Simon Property Group's base rental rate has increased for the past several years (including in 2020), unlike some of its struggling mall REIT rivals. And with more than $8 billion in liquidity, Simon has the capital to keep its properties the best destinations in their respective markets.
Furthermore, Simon is quite profitable and has positioned itself to emerge from the pandemic even stronger than it went in. For example, Simon acquired rival Taubman Centers for a significant discount to its pre-pandemic valuation. It earned $9.11 per share in funds from operations (FFO) in 2020, a reduction of about 24% from 2019 but still an impressive profit considering the environment.
In short, with shares still about 20% below where they were before COVID-19 hit, Simon could be worth a closer look for investors who believe people will still want to get out and experience things after the pandemic.
The Millionacres bottom line
To be perfectly clear, I'm suggesting both of these as long-term investment ideas. While there is certainly light at the end of the tunnel, the path toward normalization of the U.S. economy isn't likely to be a completely smooth one. I'm confident that investors will be nicely rewarded in 5 or 10 years, but there are likely to be some bumps in the road in the meantime. So, keep this in mind before you consider either REIT.