Retail real estate spans from giant enclosed malls all the way to the corner convenience store, and everything in between. There are real estate investment trusts (REITs) that focus on every segment, giving you the ability to put your money to work in vastly different ways. If you're looking at retail REITs today, you'll want to check out Simon Property Group (NYSE: SPG), Realty Income (NYSE: O), and Getty Realty (NYSE: GTY). Here's a quick look at why these very different REITs are worth your consideration as June gets underway.
1. The survivor
The coronavirus pandemic has been terrible for malls, which were already struggling with oversupply before the health scare. However, there's a silver lining to this cloud because it's forcing the industry to confront its demons, with weaker malls finally starting to close. That, in turn, will allow the stronger malls to thrive in a reverse network effect. The shakeout hasn't been easy and isn't yet over, but mall REIT Simon Property Group is already showing that it will likely come out on top.
Its collection of over 200 enclosed malls and outlet centers suffered in 2020, but the REIT is looking for funds from operations (FFO) to grow as much as 7.5% in 2021. Management actually increased its guidance when it reported first-quarter earnings. Peers are generally expecting FFO to fall this year.
Moreover, while other mall REITs were focused on survival during the downturn, Simon finalized a deal to acquire a well-situated peer and, with partners, invested in retailers. These moves already appear to be helping it come out of the pandemic downturn in a stronger position than it entered.
Although malls definitely still have problems to deal with, industry giant Simon is easily the cleanest dirty shirt. Intrepid investors can collect a fat 4% dividend yield while they wait for Simon to get back on track and start rewarding shareholders with dividend increases again.
2. Getting even better
The next retail REIT up is one that just about everybody loves, Realty Income. This company is focused on owning net lease assets, which means its tenants are responsible for most of the costs of the properties they occupy. It's generally considered a low-risk approach in the REIT space.
And Realty Income is the 800-pound gorilla, with a portfolio of nearly 6,600 single-tenant net lease properties. On top of that, the monthly-pay REIT has increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat.
But here's the thing: Realty Income just announced plans to buy peer VEREIT and its portfolio of around 3,800 properties. That will put even more distance between Realty Income and its competitors, increasing its access to cheap capital and ability to take on bigger deals. Perhaps the best part is that Realty Income expects the acquisition to be as much as 10% accretive to adjusted FFO in the first year. In other words, this industry leader is getting even better.
Although the post-merger REIT will have some exposure to industrial and agricultural assets, roughly 85% of its portfolio will still be in the retail space. Realty Income is currently offering a roughly 4.1% yield, which is about middle of the road for the REIT over the past decade, suggesting it's a fair price for a well-run REIT that's about to get even more attractive.
3. A niche player
The last name here is a bit different, since Getty Realty owns gas stations and their associated convenience stores. At the end of the first quarter, it owned nearly 1,000 properties across 35 states, with around 65% of its rents coming from top-50 markets. So it owns a pretty solid, diverse collection of assets, which sell gas under the banners that you know, like Exxon, Shell, and BP (in addition to Getty and many others). Like it or not, selling gasoline and convenience foods is still a very important business in the U.S. despite global warming concerns.
Meanwhile, Getty believes it has multiple avenues for growth. That includes built-in rent escalations in its long-term leases, acquisitions (which is the main engine here), and redevelopment. And since energy transitions can take years, there's really little near-term risk that electricity makes Getty Realty's business model obsolete. In fact, it could very easily adjust, noting that electric vehicles still need to be charged and people like the convenience of on-the-go food.
So far, meanwhile, Getty has managed to increase its dividend every year for nine consecutive years, and there's no particular reason to expect that streak to end. In fact, the REIT upped its dividend by 5% in the fourth quarter of 2020 -- despite the pandemic. If you can look past the carbon issue, which seems manageable, the 5% yield on offer from Getty Realty looks fairly attractive right now given the resilience of its business.
Just saying "retail real estate" doesn't do justice to the true breadth of the industry, which the very different businesses backing Simon, Realty Income, and Getty prove out. That said, each of these REITs has something special to offer along with their market-beating dividend yields. Simon is an out-of-favor turnaround story, Realty Income is an industry leader that's executing at the top of its game, and Getty is a niche player with a solid approach. Take the time to look this trio over, and one or more may end up in your portfolio in June.