Real estate has been one of the best-performing sectors in 2021, and the retail REIT, or real estate investment trust, subsector has been a particular standout. And it's easy to understand why -- as life gradually returns to normal in the United States, physical retail is one of the biggest beneficiaries.
However, that doesn't mean that the economic reopening and its effects are completely priced into all retail REITs. Here are two in particular that investors should keep an eye on in the second half of 2021 and beyond.
The meme stock trade could normalize this retail REIT's cash flow
STORE Capital (NYSE: STOR) has certainly come a long way since the depths of the COVID-19 lockdowns. Virtually all of the company's properties are now open for business, and rent collection has climbed from a pandemic low of about 70% in mid-2020 to 93% of billed rent in the first quarter of 2021.
However, this still isn't quite a "normal" level of rent collection. The 7% of rent that was uncollected in the first quarter was mostly the result of STORE's movie theater and family entertainment center properties. Keep in mind that there were few large movie releases during the first quarter, and many theaters remained closed.
With that in mind, I think STORE Capital's rent collection will normalize very quickly. For one thing, movie theaters and family entertainment centers are now reopened, and early indicators are quite strong. We recently heard from Bank of America (NYSE: BAC) CEO Brian Moynihan that consumer spending is 20% higher than it was before the pandemic, which could be great news for businesses like these with pent-up demand.
While there was little worry about the long-term health of family entertainment centers, there have been some serious questions about the future viability of movie theater operators, specifically AMC Entertainment (NYSE: AMC), which happens to be STORE's eighth-largest tenant. But with the recent "meme stock" trade allowing AMC to raise about $2 billion in fresh capital, the operator is arguably stronger now than it was before the lockdowns. In a nutshell, I could see STORE Capital's cash flow getting a significant boost in the second half, plus the biggest question mark on its tenant list isn't nearly as much of a concern.
Aggressive portfolio moves could put this REIT in position to finally achieve its vision
Seritage Growth Properties (NYSE: SRG) has generally been treading water since the pandemic started. Its leasing activity has been slow, its properties are losing money, and the company has been gradually selling assets to keep things going.
New CEO Andrea Olshan has different plans. Olshan has decided to aggressively pursue the sale of 40 to 50 noncore properties in order to focus on the properties in the company's portfolio with the most value creation potential, a move that could raise a half-billion dollars or more of fresh capital (not to mention get dozens of money-draining, unleased properties off the company's balance sheet).
This move could jump-start Seritage's redevelopment efforts on its highest-value properties. For example, management sees 10 to 15 opportunities to develop properties into grocery-anchored shopping centers, 25 to 35 opportunities to develop residential communities, and much more.
The real estate market is on fire now, and while most of Seritage's assets consist of vacant buildings formerly occupied by Sears or Kmart stores, they are generally located in very desirable retail locations. Now seems like a great time to aggressively monetize nonpriority assets, and if management puts the capital it raises to smart use, Seritage could go from a money pit to a self-sustaining value creation and redevelopment machine within a couple of years.
Two opposite ends of the risk spectrum
It's worth pointing out that these are two retail REITs with very different risk-reward profiles. STORE Capital is built for steady income and long-tailed growth, and recent developments with AMC should only help its stability. On the other hand, Seritage is a very binary stock -- either it will be able to execute on its vision and investors will be handsomely rewarded within the next few years, or it will run out of money and underperform the market. So, keep the risk-reward profile of each in mind before you invest.