Regency Centers (NYSE: REG) and National Retail Properties (NYSE: NNN) have yields that are more than twice the level you'll get from an S&P 500 Index fund. That's partly because of the difficulties facing the retail tenants that these landlords serve. But, if you think there's recovery potential in the retail real estate investment trust (REIT) space, it's worth getting to know these two very different landlords.
The big one
Let's get the most important issue out of the way right up front. Regency Centers owns strip malls and National Retail Properties owns single-tenant net lease assets. These are very different business models in the REIT space.
Regency owns larger assets that are generally filled with an anchor tenant, like a grocery store or big national retailer, and a number of smaller tenants, like nail salons and restaurants. The location of its roughly 400 properties is really important, since being close to wealthy and populous regions will generally lead to stronger results for its tenants.
National Retail Properties tends to buy single-tenant properties from retailers one by one. This allows the REIT to cherry pick the assets it buys for its roughly 3,100 asset portfolio, selecting those that are historically strong performers. Generally, there are long-term leases involved (often 10 years or more). Further, after the sale, the retailer remains responsible for most of the operating costs of the property. So far this sounds like a one-sided deal, with National Retail Properties coming out the big winner. But both sides actually end up winners because the retailer gets to retain access to a vital property, can ensure it gets properly maintained, and gets cash that it can use for other things, like growing its business. In the end, it's more of a financing transaction for the retailer.
Of the two models, despite requiring a longer explanation, National Retail's net lease approach is far simpler. And, historically, the REIT has been a pretty stable performer, racking up an incredible 31 years worth of annual dividend increases. That includes a hike in 2020, which was a terrible year for retail. Regency Centers has increased its dividend for seven years, but didn't increase its dividend in January as it had in each of the past two years. That doesn't mean Regency's annual streak is over, but if there isn't an increase made in 2021 it will be. It is worth noting that Regency ended up cutting its dividend during the 2007 to 2009 recession, so it wouldn't be shocking if the annual streak did end thanks to the pandemic. National Retail's streak will continue unless it ends up cutting its dividend (which is highly unlikely).
So the two REITs have different models and notably different dividend histories, which is likely to be very important to dividend-focused investors. But there's another interesting thing to examine here. Regency Centers' stock price is only off around 15% from its pre-pandemic 2020 highs. National Retail Properties' stock price is lower by just shy of 25%. Granted, Regency Centers' properties are open air, which probably gives it an edge over enclosed malls, but single-tenant properties are basically open air, too. So this disparate price movement is interesting.
Some of this difference might be attributable to Regency Centers' rent-collection trends. In the second quarter, rent collection fell to roughly 80%. That's not great, but it is a fair bit better than National Retail Properties, which collected roughly 70% of its rents that quarter. However, both are back up in the 90% range at this point. So rent collection doesn't seem like it's a big deal anymore. Occupancy wise, both REITs appear to be doing fairly well, too, with 90% plus rates, though National Retail is the stronger of the two by a little bit.
All in, it might just be that investors are giving a preference to shopping center REITs right now, noting that the stock of net lease bellwether Realty Income (NYSE: O) has also fallen behind Regency. This suggests that dividend investors looking for a long-term play in the retail sector might want to lean toward the laggard stock of National Retail over Regency Centers. That's doubly true when you consider National Retail's much better dividend track record.
The final call
Obviously, if you want to own a strip mall REIT, then Regency Centers is the only option you should consider in this pairing. However, if what you really want is exposure to retail real estate, then National Retail Properties is probably the better bet, given its similar operating performance right now and its way- better long-term history of returning value to investors via dividends. You'll also get to collect its 4.9% dividend yield, which is more generous than the roughly 4.5% yield you'd get from Regency.