Last year was a terrible year for retailers, and while 2021 will likely be better, there's still a lot of pain out there today. That's flowed through to the real estate investment trusts (REITs) that own retail properties, since bankruptcies and store closures are putting pressure on the rent roll. But, if you focus on well-positioned names, today's headwinds could actually be a buying opportunity. Here are three retail-focused REITs to consider adding to your portfolio right now.
1. Go big or go home
With over 200 enclosed malls and factory outlet centers, Simon Property Group (NYSE: SPG) is easily the largest player in the mall niche. It tends to own highly desirable properties near large and wealthy population centers. These are the types of assets in which retailers want to be located and to which shoppers want to go... at least during more normal times. Right now there's a lot of upheaval in the sector because of the ongoing retail apocalypse and the coronavirus pandemic. That's making it hard for mall owners to re-tenant their properties.
But Simon is one of the best positioned in the space, with industry-leading balance sheet strength. In fact, it has been using the headwinds facing the mall sector to invest in its business. That includes buying Taubman Centers, a smaller peer with desirable properties, and, with partners, buying retailers out of bankruptcy. It has even formed its own blank check company so it can put more money to work. And, despite the headwinds, Simon is still paying an all-cash dividend at a rate of 5.3%. To be fair, the mall REIT cut its dividend nearly 40% in 2020, but management believes the current rate is sustainable even in these tough times.
Meanwhile, Simon's stock price is roughly 50% below its 2018 highs. This is not a great option for a risk- averse investor, but for those willing to go where others are afraid to tread, will probably like this well-positioned mall landlord.
2. Power strip
The next name up is Federal Realty Investment Trust (NYSE: FRT), which owns around 100 shopping centers and mixed-use developments. Most of these properties have grocery stores as anchor tenants and contain the types of stores you visit on a regular basis. Like Simon, Federal Realty is focused on densely populated and wealthy areas. That said, there's one big difference between the two --- Federal Realty increased its dividend in 2020.
To be fair, the dividend hike was a token amount, just 1%. It was, really, just a symbolic gesture showing the REIT's commitment to its dividend. But it was important, given that Federal Realty has increased its dividend every year for more than five decades, which is twice what's needed to achieve Dividend Aristocrat status. Federal Realty actually expects the first half of 2021 to be pretty tough, with occupancy dropping into the mid-80% range. But it is already seeing interest in its highly desirable vacant space.
It will take time for Federal Realty to re-tenant its properties, but the process is underway. And while other investors are focused on the negatives, you might want to focus on the positives and collect a historically high 4.6% yield (the yield hasn't been this high since the 2007 to 2009 recession), which suggests the stock is pretty cheap right now.
3. A little twist
The next name on this retail REIT list, VEREIT (NYSE: VER), isn't actually a pure-play retail REIT, it's a diversified net lease REIT. That means that it owns single-tenant properties for which the tenants are responsible for most of the asset's operating costs. But, with nearly two-thirds of its properties in the retail or restaurant spaces, it is clear that retail is the core of the portfolio. The office and industrial assets it owns, which account for the rest of the portfolio, add valuable diversification.
Here's the thing, VEREIT has gone through a major overhaul in recent years following an accounting scandal under previous management. It is, basically, a new company, with a revamped portfolio and investment-grade balance sheet. And while it cut its dividend 45% in 2020, that decision could be viewed as the final step in the company's turnaround. Notably, the funds from operations (FFO) payout ratio in the third quarter of 2020 was a very low 50%. After several years of retrenching, VEREIT appears ready to start growing again, with ample room to increase the dividend as it expands its portfolio. Once a turnaround story, VEREIT is ready to become a growth story with a generous 4.1% yield. With the stock still off 25% from its early 2020 highs, now could be a good time to jump aboard before more investors figure out that VEREIT is ready to move beyond its troubled past.
It isn't easy
Simon, Federal Realty, and VEREIT are not the types of REITs that will allow you to sleep well at night right now. Buying them requires a bit of fortitude, since others are clearly still fearful based on their stock price declines. But if you can look beyond the recent past and see that the future is likely to be much brighter, then financially strong mall giant Simon, shopping center Dividend Aristocrat Federal Realty, and net lease turnaround VEREIT are all worth a deep dive right now.