The retail niche of the real estate investment trust (REIT) sector actually contains a number of different subsectors, each with its own dynamics and major players. Here are three pure play leaders in the net lease, strip mall, and enclosed mall areas. Each is worth examining in August for investors who want to add some extra retail exposure to their REIT portfolios.
1. One at a time
Net lease properties are single-tenant assets where lessees are responsible for most of the operating costs of the properties they occupy. Real estate investment trusts that operate net lease portfolios basically just have to sit back and collect rent. The net lease approach, which is generally considered a low-risk way to invest in real estate, can be applied to a lot of different property types. However, National Retail Properties (NYSE: NNN) is focused 100% on retail with a portfolio of roughly 3,150 properties.
The biggest draw, however, is the consistency of the company's business, with over three decades of annual dividend hikes under its belt. That includes an increase during 2020, which was a difficult year for the retail sector. And while the REIT was hit hard early on with collection issues, it recovered quickly and is now collecting basically all of its rent.
Meanwhile, it has continued to buy and sell properties, with the goal of strengthening its portfolio for the long term. This steady performer's dividend yield is around 4.2%, which isn't particularly high historically speaking, but if dividend consistency is important, National Retail Properties and its tried and true net lease business model should be on your list of retail REITs to examine in August.
2. Grocery stores and more
The next big category in the retail space is strip malls, which aren't particularly glamorous but tend to be vital local properties that are visited regularly. That's partly because they often contain grocery stores, which are key tenants in nearly 80% of strip mall giant Kimco's (NYSE: KIM) portfolio.
Kimco's business is a lot more complex than a net lease portfolio because the REIT has to manage multiple spaces at each property it operates and is responsible for the costs of the properties, too. In fact, 2020 was a tough year for Kimco, with the landlord forced to cut its dividend. However, Kimco has just inked an acquisition that should position it for a brighter future.
The purchase of peer Weingarten Realty (NYSE: WRI) will expand Kimco's portfolio from 400 properties to nearly 550 and increase the REIT's presence in higher-growth Sun Belt regions. And it will actually improve Kimco's balance sheet because Weingarten is in better financial shape. Kimco expects the deal to be accretive from day one. Essentially, Kimco is set to come out of the pandemic with a better industry position than when it entered. The 3.2% yield isn't huge, but investors looking at retail REITs should take a deep dive here. The future looks like it will be much better than the recent past.
3. Inside and out
The last broad category of retail assets is malls, which generally includes both enclosed malls and factory outlet centers, which tend to be outdoors. While all of retail got hit in 2020, malls were probably the worst impacted, noting that three major mall REITs have gone bankrupt. However, that was never a material risk for industry giant Simon Property Group (NYSE: SPG). The company has around 200 properties spread across the enclosed and outlet spaces, providing more diversification than any of its peers. And while it cut its dividend around 40% in 2020, it has already gotten back to increasing it again.
The really exciting thing here, however, is that Simon, like Kimco, used the downturn to improve its industry positioning. That involved completing a deal to buy a major competitor and investing, with partners, in struggling retailers. With retail sales already coming back, both of these moves look pretty good already.
Long-term investors, meanwhile, should take a look at the 2007 to 2009 recession. Like it did during 2020, Simon cut its dividend and worked to improve its industry position during that downturn. It then put up a long string of dividend increases that took its dividend from $0.60 per share per quarter to $2.10. If the recent hike is the start of another upturn like that, investors will be well rewarded here. Meanwhile, the current yield is roughly 4.5%, which isn't a bad starting point.
Plenty of options
Retail is a pretty big space in the real estate sector, and there are a lot of options for investors. However, the trio above, National Retail Properties, Kimco, and Simon, offers exposure to the key niches via REITs with strong operating histories and solid futures. Although 2020 wasn't kind to any of them, all three look ready to bounce back strongly.