It's no secret that the retail sector is facing some pretty strong headwinds. Consumers have been steadily shifting more of their spending online, which has only accelerated because of the pandemic. Meanwhile, retailers deemed nonessential by governments are eagerly awaiting the day when vaccines put the pandemic in the rearview mirror.
These issues have impacted landlords like retail REITs, or real estate investment trusts, which are trying to keep their properties occupied to continue generating income. One way they're doing that is by buying or redeveloping properties to attract more resilient retail tenants. Two REITs with solid strategies to battle the retail sector's headwinds are Agree Realty (NYSE: ADC) and Kimco Realty (NYSE: KIM). Here's why that makes them ideal retail REITs for investors to consider buying this May.
Putting a priority on quality
Agree Realty focuses on owning single-tenant properties triple net leased to high-quality retailers. It concentrates primarily on investment-grade retailers highly resistant to disruption from e-commerce and recessions.
Overall, 67.5% of Agree's tenants have investment-grade credit, implying that they have the flexibility to meet their financial obligations (e.g., rent) even if economic conditions deteriorate. Meanwhile, it owns properties leased to essential physical retailers in categories like home improvement, grocery, tire and auto service, convenience, dollar, and pharmacy.
That focus on quality paid off last year, as the REIT collected more than 95% of the rent it billed. Because of that and its solid financial profile, Agree Realty had the flexibility to continue growing its portfolio and dividend. It committed to investing a record $1.36 billion last year and sees the potential for spending another $800 million to $1 billion on additional acquisitions in 2021. That should enable Agree Realty to continue growing its 3.7%-yielding dividend, which it now pays monthly.
A bold bet on the future of retail
Kimco Realty focuses on owning open-air, grocery-anchored shopping centers and mixed-use properties. It concentrates on high barrier-to-entry coastal markets and fast-growing Sun Belt cities. This strategy helped Kimco last year, as most of its shopping centers remained open because people needed access to essential retailers like grocery stores.
The company recently doubled down on its strategy by agreeing to acquire fellow retail REIT Weingarten Realty Investors (NYSE: WRI) for nearly $6 billion. The deal will enhance its exposure to grocery stores from 78% of its properties by ABR to 79%. Meanwhile, it will increase its focus on the Sun Belt region from 42% of its ABR to 53%. The combination will also increase its scale, reduce its costs, and improve its redevelopment pipeline.
The combined company has several projects underway to add multifamily units and grocery stores to existing retail properties, enhancing their appeal to other tenants due to the steady traffic from residents and grocery shoppers. Meanwhile, the acquisition of Weingarten adds a $2 billion redevelopment pipeline that could turn more of its shopping centers into mixed-use properties that blend residential with retail, dining, and entertainment.
As Kimco transforms more of its shopping centers into mini-town centers, it should create value for shareholders over the long term by making it even more resistant to the impact of e-commerce.
Focused on the future of physical retail
While consumers will continue shifting more of their shopping online, physical retail will play a role in meeting their needs. That's why Agree Realty and Kimco Realty are focusing on investing in properties that will benefit from this future by filling their portfolios with properties supported by high-quality, essential retailers. Their strategies should pay off over the long term, making them ideal retail REITs to consider buying now.