The global coronavirus pandemic has dealt a devastating blow to many retailers with a focus on brick-and-mortar stores. It's not been easy for retail landlords, either, with a number of high-profile mall real estate investment trusts (REITs) falling into bankruptcy court. But not all retail landlords are in dire trouble, and a few look like they could be long-term winners despite some near-term trouble. Here are three retail REITs that real estate investors should be looking at right now.
1. Old faithful
Realty Income (NYSE: O) is a net lease REIT that has increased its monthly-pay dividend for more than 25 consecutive years (including four hikes in 2020), making it a Dividend Aristocrat. It owns a portfolio of around 6,500 properties, and around 85% of its rent roll comes from the retail sector (the rest is a mix of office and industrial). As a net lease REIT, its tenants are responsible for most of the operating costs of the properties they lease, which reduces risk and complexity for Realty Income and its shareholders.
The REIT currently offers investors a yield of around 4.5%, about the middle of the stock's yield range over the past decade or so. Thus, it looks pretty fairly priced today. While value investors probably won't appreciate it, conservative long-term investors willing to pay full fare for quality will likely be attracted to it.
And Realty Income is looking to make use of the current downturn. as it expects to buy $3.25 billion worth of properties in 2021. That should support the REIT's long-term trend of slow and steady growth. Realty Income won't likely excite you, but it should keep paying you through thick and thin.
2. Older and even more faithful
If you like the notion of buying a Dividend Aristocrat, you'll be even more excited about owning a Dividend King. This is the nickname some give to companies, like Federal Realty Investment Trust (NYSE: FRT), that have increased their dividend annually for 50 or more years. There have been a lot of ups and downs over five decades, and Federal Realty has weathered the peaks and troughs while still paying investors for their continued commitment. That's something to keep in mind as the strip mall and mixed-use development owner projects occupancy weakness to continue through the first half of 2021.
The thing is, Federal Realty owns around 100 properties located in highly populated areas filled with wealthy residents. Size-wise, it owns a fairly modest portfolio, but it's been highly curated over the years to contain top-quality assets. Management has actually been fielding calls from potential tenants looking to move from nearby locations into a Federal Realty property to "upgrade" their locations.
Retenanting a property takes time, but for long-term dividend investors looking for stability, Federal Realty and its roughly 4% yield could be a good addition today. Notably, the dividend yield is still at the high end of the stock's 10-year yield range.
3. A leap of faith
The final REIT on this list is a bit more complicated. Simon Property Group (NYSE: SPG) owns around 200 or so enclosed malls and factory outlet centers. Malls have been hit particularly hard by the pandemic restrictions used to slow the spread of the coronavirus and implement social distancing. The REIT even ended up cutting its dividend in 2020 by around 40%.
And there are no easy fixes here, Simon's recovery will likely be slow and drawn out as it looks to get new, desirable tenants into its malls. The yield today is roughly 4.5%.
However, Simon is one of the best-positioned mall REITs in the sector and has actually been using the downturn to strengthen its business. That's included moves like buying a competitor and investing, along with partners, in retail companies. Moreover, its generally well-located and productive malls are likely to be net winners as weaker malls close, benefiting from a reverse networking effect.
But the really exciting thing is that Wall Street has seen this before, during the deep 2007 to 2009 recession. During that rough patch, Simon strengthened its business and came out a better company than before. It looks like that could play out again here, with dividend growth likely to resume once its properties get back on more solid ground. This isn't a good option for conservative types, but more aggressive investors willing to ride out some turbulence could end up well rewarded if history does, in fact, repeat itself.
Time for some deep dives
Although retail REITs have bounced back from their deeply depressed prices during the worst of the 2020 bear market, there are still some interesting options out there for long-term investors. Realty Income is a slow and steady name that's working through the current headwinds in relative stride. Federal Realty has a few more quarters of trouble ahead, but its well-situated properties are seeing increasing demand from retailers. And Simon Property Group is still muddling through tough times but has been working to strengthen its business so it comes out the other side of the pandemic a better company -- as it's done before. All three are worth a close look right now.