Many investors are hesitant to put their money into any retail-focused investments, and that's certainly understandable. Physical retail was struggling a bit before the pandemic, and no fewer than three mall real estate investment trusts (REITs) have gone bankrupt in 2021 alone.
However, not all retail REITs are the same, and some could end up being big winners as the world gradually returns to normal over the next few years. Here are two in particular that look like smart buys as we head into the fourth quarter of 2021.
Retail that can thrive in an e-commerce world
STORE Capital (NYSE: STOR) owns a portfolio of more than 2,700 single-tenant properties, most of which are operated by tenants in service or retail businesses. Restaurants are a big part of the portfolio, as are convenience stores, automotive service centers, and car washes.
The key point is that most of STORE Capital's tenants aren't susceptible to e-commerce disruption. And even those that are sell products people tend to want to buy in person. For example, Camping World (NYSE: CWH) is one of STORE's major tenants, as is Bass Pro Shops.
STORE Capital has grown significantly in just over seven years as a public company, but it could be just getting warmed up. STORE estimates that $3.9 trillion of real estate exists that could fall within its investment criteria -- and with a market cap of less than $9 billion, STORE could multiply in size several times over in the years ahead.
For REIT dividend investors, STORE Capital not only pays a dividend yield of about 4.8% but has also increased the payout every year since going public in 2014 -- including in 2020. In fact, STORE Capital just announced a 6.9% increase in its dividend starting in October. And with shares down more than 10% over the past month and no company-specific news behind the move, now could be a great time to add STORE to your portfolio.
Top-quality malls will be just fine
As mentioned earlier, three mall REITs have already gone bankrupt in 2021. But it's important to realize that these REITs owned lower-quality malls, had excessive debt, or both.
Simon Property Group (NYSE: SPG) is another story. The company owns some of the busiest, most valuable mall properties in the entire world and, with its Premium Outlets brand, has a dominant lead in the outlet mall market. Over the years, Simon has done an excellent job of making destinations out of its malls by adding nonretail elements like entertainment venues, hotels, trendy dining options, office spaces, and much more.
The strategy has certainly paid off.In fact, Simon is one of the few retail REITs that didn't suspend its dividend in 2020, and the company recently raised its full-year guidance due to strong shopper traffic and retail sales. And with nearly $9 billion in liquidity, the company has the financial flexibility to keep up with changing consumer tastes going forward.
And with shares trading for just 12x the full-year funds from operations (FFO) estimates -- and for roughly half of their pre-pandemic high -- Simon could be worth a closer look now.
The Millionacres bottom line: Buy for the long term
To be perfectly clear, I'm suggesting these two retail REITs as long-term investments. I have absolutely no idea what their stock prices will do over the coming weeks or months. However, these are well-run businesses with excellent assets and lots of room to grow, and I think there's a great chance that long-term investors who add them to their portfolios now will be glad they did.