As the global pandemic starts to heat up again, the retail sector looks like it could feel the sting of another round of government-mandated store closures. It's a terrible situation all around, even though there are some glimmers of hope on the vaccine front.
For intrepid types who believe the world will eventually move past the coronavirus, there's an opportunity to buy great companies while most investors are still largely fearful. Federal Realty Investment Trust (NYSE: FRT) and STORE Capital (NYSE: STOR) are two retail-focused real estate investment trusts (REITs) worth looking at right now.
There's one rule in real estate
There's an old saying when it comes to buying property: location, location, location. Essentially, it means you'll likely do well if you have a well-situated asset. That's something REIT Federal Realty takes incredibly seriously. While it only owns around 100 retail centers and mixed-use developments, it's been very careful to ensure each one is located near densely populated and wealthy areas. To put some numbers on that, on average 170,000 people live within three miles of its centers, with an average income of $127,000.
Yes, the REIT has been dealing with fallout from government-mandated store closures and people choosing to socially distance. Its rent collections fell to 68% in the second quarter of 2020 and were still only at around 85% in the third. However, its largely grocery-anchored properties are the kinds of places consumers tend to visit regularly and retailers want to be in. For proof Federal Realty was able to sign 50 new leases in the second quarter and 101 in the third. Times are tough today, for sure, but the REIT's business has not fallen off a cliff.
In fact, the investment grade-rated REIT increased its dividend in the third quarter. That brings its annual streak of doing so to an incredible 53 years and was, very purposefully, a show of strength in the face of broader adversity. With a generous yield of 6.1%, dividend investors would be wise to do a deep dive while investors remain downbeat on the retail space.
Proving the model
The next name here, STORE Capital, isn't exactly a pure play on retail, but it generates roughly 80% or so of its rents from retail and service-related properties. So, generally speaking, it's probably best to consider it a retail-focused REIT (the rest of the portfolio is in industrial assets). That said, it's only been publicly traded since 2014, so the global pandemic is the first economic rough patch it's lived through. It's doing a pretty good job, noting that it increased its dividend in the third quarter and is currently collecting 90% of its rents, up from a low of 70% in May.
STORE is a net lease REIT, meaning it owns single-tenant properties for which its lessees are responsible for most of the operating costs of the assets they occupy. Although a simplification, STORE just has to sit back and collect rent. That said, the REIT tends to originate its own leases. So it both controls the lease terms and generally gets a deeper understanding of its tenants' finances, which helps to further reduce risk.
STORE has made a purposeful decision to focus on service-related assets (roughly 63% of rents), which should help to insulate it a bit from the retail apocalypse that's upending the business of traditional retailers as consumers shift toward online shopping. The traditional retail properties it owns, meanwhile, are curated, too, with a focus on auto dealers, home furnishings, and outdoor activities. This is not your typical retail REIT -- but that's the point.
On the dividend front, meanwhile, the third-quarter hike means STORE is on pace to have increased its payment in each year of its public life. If its performance through the pandemic is any indication, this REIT is well on its way to becoming an industry standout.
But the shares are still unloved, offering a generous 4.6% yield (the average REIT yields around 3.9%, using Vanguard Real Estate ETF (NYSEMKT: VNQ) as a proxy). For investors trying to find bargains today, STORE is definitely worth a deep dive right now.
The Millionacres bottom line
It's not easy buying stocks when other people have been selling. However, it's a time-tested way to find stocks that are on sale. You need to tread carefully, of course, because clearly, some retail-focused REITs are in deep trouble. Mall owner CBL & Associates (NYSE: CBL), for example, recently declared bankruptcy.
But if you look closely and really get to know what you're buying, you can find some hidden gems. Federal Realty and STORE Capital both look like they are diamonds in the rough today.