By virtually every measure, 2020 has been a difficult year for retail-focused real estate investment trusts (REITs). The main headwind, of course, has been the global pandemic that's kept people out of physical stores, at times by government mandate. However, if you're looking for cheap real estate stocks, the current headwinds could be opening up a very big opportunity to buy some great names on the cheap, including STORE Capital (NYSE: STOR), Federal Realty Investment Trust (NYSE: FRT), and Simon Property Group (NYSE: SPG).
The new kid on the block
Although STORE Capital probably wouldn't describe itself as a retail focused REIT, 18% of its rent roll comes from traditional brick and mortar stores with another 65% from service-focused businesses (the rest is diversified into industrial assets). All in, that's 83% in what most people would describe as retail properties. That said, the company uses a net lease model, which is generally considered a conservative niche of the REIT sector. Basically, its tenants are responsible for most of the operating costs of the single-tenant properties they occupy. And STORE tends to originate the leases for the properties it owns, so it has a good handle on its tenants and can build in owner-friendly terms.
The problem with STORE is that it is a relatively young company, publicly speaking, having IPOed in 2014. That means the REIT hadn't lived through a downturn, so investors had no history to look at when COVID-19 pushed the U.S. into a recession in February. But STORE has done well as it deals with the current headwinds. Rent collections dipped to a troubling 73% in the second quarter but were back up to 90% by October. The REIT even increased its dividend in September, in a show of strength.
The price of the REIT, meanwhile, is off by roughly 30% so far in 2020 and the yield is now an enticing 5.6%. Yes, it leans heavily toward retail assets, but the business is holding up very well to its first real test. It's worth a close look for long-term investors while the stock remains unloved.
A massive streak
Next up is Federal Realty, which has no qualms about being labeled as retail focused. The company owns around 100 outdoor shopping centers and mixed-use developments. The REIT has been around for a very long time, amassing an over five-decade long run of annual dividend increases. That includes an increase in October. The thing is, Federal Realty is facing material headwinds right now.
To put a number on that, the REIT was collecting just 50% or so of its rents during the worst of the downturn. The third quarter number is up to 83%, which is basically where STORE was when things were really bad. So Federal Realty is definitely not hitting on all cylinders, though things are improving. That helps explain why the stock is down around 45% so far in 2020, and the yield, at roughly 6.1%, is the highest it has been since the 2007 to 2009 recession.
The thing is, the properties that Federal Realty owns are highly curated. They are in high-barrier-to-entry markets with large wealthy populations. These are the types of properties that tenants want to be in and consumers want to shop at. If you can handle some near-term uncertainty and believe that location, location, location is the most important thing in the real estate market, then Federal Realty should be on your short list today.
A big risk
The last REIT, Simon Property Group, is probably the one that will keep investors up at night. It owns around 200 enclosed malls and outlet centers. Although most of those properties are located in North America, it has exposure to Europe and Asia, as well. Malls were shut down completely in many parts of the world during the worst of the pandemic. And it has been hard to convince shoppers to return to these properties even after they have reopened. This headwind comes on top of the so-called retail apocalypse that has been hammering malls for years. So things are pretty bad for Simon right now.
In fact, the REIT cut its dividend by about 40% earlier in the year because of the troubles it has had collecting rent from its tenants. Although Simon hasn't released numbers, it has gone to court to force tenants to pay what they owe, which is not a good sign. It would be an understatement to suggest that things are hard today for mall REITs. But, with the stock off nearly 60% so far in 2020 and a yield of 8.2%, even after the cut, more intrepid types might want to take a close look.
The story here is that good malls are likely to remain opened while lesser quality malls are likely to get shut down. Simon tends to own well located and desirable properties that should largely survive the industry shakeout. As malls close, the value of surviving malls to shoppers and retailers will likely increase in something of a reverse network effect. The problem is muddling through this industry rough patch, which will include replacing troubled tenants with better ones, to benefit. On that score, Simon has one of the strongest balance sheets in the industry to go along with owning some of the best properties. This is a multi-year turnaround play, but the hit so far this year could make this a compelling opportunity for more aggressive types.
Taking on some risk
None of the names here are risk free, but they are all interesting ways to play the pain in the retail sector that's come from COVID-19. For risk averse investors, STORE Capital's rapid rental recovery should make it appealing. For those with a little more risk tolerance, Federal Realty has a long history of success behind it and a very well located portfolio of properties. While near-term headwinds may have investors spooked, location matters when it comes to real estate. And, finally, for investors willing to make aggressive bets, Simon is dealing with dual headwinds that will likely crush some of its peers. But that will just make Simon even more attractive. If you're looking for cheap real estate stocks, there's likely to be at least one name on this list that you'll find appealing, if not more.