Fall is a wonderful time of year, with the trees starting to change and the hot days of summer finally over. Oh, and the holiday season is fast approaching. Which is why you might want to take a closer look at these two retail-focused real estate investment trusts (REITs) now, before the year's biggest selling season has gotten underway. Here's why Realty Income (NYSE: O) and Simon Property Group (NYSE: SPG) should be on your buy list as the year draws to a close.
1. About to get bigger
Realty Income is one of the largest net lease REITs you can buy, with a market cap of $25 billion. It's a bellwether in the space, with a portfolio that is 85% or so retail (the rest of its properties fall under industrial and office spaces). And it has increased its dividend annually for over 25 consecutive years, making it a Dividend Aristocrat. It's a very well-run company, and investors are aware of the many positives here, noting that the 4.3% dividend yield on offer today is only about middle of the road over the past decade.
So why buy a REIT that looks like it is, at best, fully priced? The answer is that this landlord is about to make a huge acquisition. Its pending purchase of peer VEREIT has been approved by shareholders and is expected to close in the fourth quarter. This is going to increase the size of the portfolio from around 6,600 properties to over 10,000. That's a holiday gift to tell your friends about!
The transaction will give Realty Income a size and scale that none of its peers can come close to matching, allowing it to take on deals that others couldn't. It will also provide enhanced access to cheap capital and the ability to spread operating costs over more properties. Realty Income expects the deal to be 10% accretive from day one. But there's a lingering benefit as well, because Realty Income will be able to roll over VEREIT's debt at lower rates in the years ahead, reducing costs even more.
Simply put, this is a great REIT that's about to get even better. And that's worth a premium price. Buying now, meanwhile, allows you to get in before the transaction is consummate and the strong results that are expected to result from it start to show up.
2. The big test
Mall landlord Simon Property Group isn't in as good a position right now, thanks to the impact of the coronavirus pandemic in 2020. Government-mandated store closures and social distancing took a huge toll on the 200 or so malls and outlet centers this REIT owns. It even had to take some of its tenants to court to get paid the rent it was owed.
Things have gotten materially better since the darkest days last year, but there are still notable headwinds to deal with. That includes the hard work of releasing space that was left empty by the many store closures and bankruptcies in the retail sector.
The fall, however, is prime shopping season, given the approaching holidays. So it will provide important insight into how well Simon is doing as it looks to turn its business around. That sounds like a somewhat risky proposition, except that the first and second quarters were way better than expected.
As an example, the REIT increased its full-year funds from operations (FFO) guidance in both quarters and has upped its dividend twice so far in 2021. It looks like this mall giant is hitting on all cylinders right now.
But here's the interesting thing: During the downturn, Simon worked with its retailers to help them muddle through the pandemic hit. That often resulted in reworking leases to include more percentage rent, where Simon gets paid more if sales are higher and less if sales aren't that great. Customers have already proven they are willing to come back and shop.
Specifically, during Simon's second-quarter 2021 earnings conference call, the company noted that sales were already back to 2019 levels. It seems pretty likely that the holiday season will be a good one for Simon's malls and, given the increased use of percentage rent, a good one for Simon, too. The current yield is a generous 4.5%, adding to the allure here.
Time to act
When it comes to investing, there's really nothing particularly special about the fall, but with Realty Income and Simon, there are very real reasons to find this time period of interest. Realty Income is about to make a change in its growth, while Simon will have a chance to show just how well positioned it is in the mall sector. The time to act is before these unique events take place.