Retail-focused real estate investment trusts (REITs) struggled mightily as the coronavirus pandemic spread. However, the sector is adjusting and, once the world moves past COVID-19, some names are prepared to thrive. Here are three pure-play retail REITs you may want to look at right now.
1. Strip malls
One of the most important areas of the retail REIT space is probably the lowly strip mall. These properties are generally anchored by a grocery store, which draws traffic in, with a collection of smaller stores around it, like restaurants, salons, and drycleaners. These are the types of properties that you visit on a regular basis to simply get your life chores done. The king of this niche is Federal Realty Investment Trust (NYSE: FRT), with a modest sized portfolio of around 100 properties.
It's the name to watch, however, because it has over 50 years worth of annual dividend hikes under its belt and a dividend yield of around 4.8% -- near the highest levels since the 2007 to 2009 recession. The key here, however, isn't the dividend; that's just an indication of how attractive the stock is right now. The big story is that Federal Realty has long focused on owning the best assets in the best locations, specifically in areas with large and wealthy populations, and investing to keep them that way. Although the next couple of quarters are likely to be tough, with occupancy falling as it retenants its assets, management expects the quality of its real estate to shine through toward the back half of 2021. That means now is the right time to be looking at this strip mall REIT.
2. The "mall" option
Another retail name to consider, Tanger Factory Outlet Centers (NYSE: SKT), gets lumped in with the enclosed mall niche, but there's an important difference here today. As this REIT's name implies, it owns outlet centers. Most of its nearly 40 properties are outdoor structures, while most of the malls its peers own are indoor structures. That's a big difference, with customers worried about being in close proximity to other people. Having outdoor malls is an edge and helps explain why the company's properties saw foot traffic during the fourth quarter that was around 90% of 2019's levels. If you need to or just want to shop, an outdoor location is probably more desirable than an indoor one.
Adding to the allure here, Tanger has just reinstated its dividend after suspending it during the early days of the pandemic. Although the new dividend is lower than it was before the pandemic (the yield is around 5.3%), bringing the disbursement back is a clear sign that management's view of the future is improving. Meanwhile, the REIT's balance sheet remains strong, with $680 million in liquidity available to muddle through until the world beats the coronavirus. With advantaged assets and plenty of cash on hand, investors thinking about malls should take a close look at Tanger.
3. Free standing
The last name here hails from the net lease sector, National Retail Properties (NYSE: NNN). While there are more diversified net lease REITs, this company is squarely focused on owning single-tenant retail properties in the United States. The pandemic was hard, with National Retail collecting only around 50% of its rents in the early days. But things have improved materially since that point, with collections back up to 94% in October of 2020.
Notably, despite the headwinds, the REIT increased its dividend in 2020, adding another year to its over- -three-decade-long dividend increase streak. The yield today is 5.1%. That's backed by a company with over 3,000 properties and an investment-grade balance sheet. If you are looking to invest in retail-focused assets, this net lease REIT has proven over time that it has what it takes to survive and thrive. When the pandemic is better controlled, its strengths will draw investors back in.
Covering all the bases
It is hard to get excited about retail REITs today, given the still-material headwinds from the pandemic. However, Federal Realty, Tanger, and National Retail Properties are industry-leading names that cover the main retail property types. And all three look like they have managed the coronavirus hit in relative stride. If you are looking for out-of-favor names at a time when the stock market is hitting all-time highs, these three pure-play retail REITs are a great place to start your search right now.