The COVID-19 pandemic remains an ongoing situation, but the finish line is now in sight. We now have safe, effective vaccines, and it's only a matter of time before they're distributed to every person who wants one.
While the end of the pandemic should certainly be a tailwind for retail REITs, or real estate investment trusts, there's still quite a bit of uncertainty preventing this subsector from reaching pre-pandemic price levels. In particular, we don't know how long it will take to vaccinate the population to the point where we reach herd immunity. It could happen in March, or it could take well into the second half of the year. So, while many retail REITs have rebounded, these two in particular could still have lots of upside potential once the pandemic finally comes to an end.
This REIT could have a very bright future
Tanger Factory Outlet Centers (NYSE: SKT) has performed quite well in recent months but is still down by more than 29% as of mid-December 2020. And to be fair, there are some good reasons for this. For one thing, several of Tanger's top tenants -- such as Ascena Brands and J.Crew -- have declared bankruptcy during the pandemic, leading to a rise in vacancies at Tanger's properties.
However, there are reasons to be optimistic. For one thing, as a more pandemic-friendly type of retail than indoor malls, Tanger's open-air outlet centers are actually performing quite well. While there are more vacant storefronts than before, virtually all of Tanger's occupied stores have reopened. And by September, customer traffic had rebounded to more than 98% of 2019 levels.
Second, Tanger has tons of liquidity to not only make it through but pursue attractive opportunities, which -- given the current uncertainty surrounding retail -- should be plentiful in the coming years. At the end of the third quarter, Tanger has about $640 million in available liquidity, a huge amount for a company with a roughly $1 billion market cap.
Finally, Tanger is thinking outside the box when it comes to monetizing its properties, and that's extremely encouraging. The company launched a virtual concierge program to allow customers to shop the outlets from home. It's pursuing leases with more "essential" and recession-resistant businesses, such as furniture retailers (which also take up more space than the typical outlet tenant). And just recently, Tanger leased unused space in some of its parking lots to COVID-19 testing providers, monetizing its properties in a completely new way.
If this retail REIT figures out its finances, the sky's the limit
Seritage Growth Properties (NYSE: SRG) is the more speculative of the two stocks discussed but could also produce tons of upside if things go well.
If you aren't familiar, the company was formed for the specific purpose of taking old Sears and Kmart properties and converting them into modern, mixed-use properties with retail, residential, and other elements. And the early results have been promising: Seritage's average completed redevelopment project generates roughly four times the rent of the previous (Sears or Kmart) tenant. With plenty of high-potential properties yet to develop, there's tons of value that could be created for Seritage shareholders.
The problem, and the main reason the stock is still down more than 60% in 2020 is financing. Unlike many other retail REITs, Seritage doesn't have much liquidity. It has about $90 million on its balance sheet right now, and its business isn't profitable -- after all, it takes lots of money to do large-scale redevelopment.
Seritage has a $400 million credit line, but it can't access it until it has $200 million of annual non-Sears rental income, which it hasn't reached yet. And to add to the uncertainty, the company is in the middle of trying to find a new CEO.
If Seritage can figure out the financial side of its business, there's massive potential to unlock value from its portfolio. That remains a big if for now, but if the company can get there, it could be a huge catalyst for its stock.
Expect a roller coaster ride
A final thought: While I own both of these REITs and believe they have tremendous potential, I have no delusions that the path higher will be a smooth or quick one. In fact, I'd expect lots of volatility for as long as the pandemic continues and even for some time beyond as retail sales ramp back up.