Physical Retail Isn't Dead: 5 Great Stocks for Its Future

There are plenty of brick-and-mortar retail stocks I wouldn't touch right now. Smaller mall and shopping-center operators, for the most part, aren't currently in good shape. And I'm hesitant to invest in any mall- or shopping-center-based retail company directly.

However, there are some retail real estate investment trusts, or REITs, that could end up being excellent investments in the long run, especially at the fire-sale prices we're seeing during the COVID-19 pandemic. Here's a look at the five stocks in my "retail isn't dead" basket, and why I'm confident enough to own all five in my own portfolio.

Image source: Getty Images.

Data source: yCharts. Figures as of 6/25/2020.

1. Simon Property Group

Simon Property Group is the largest mall operator in the U.S. and owns some of the most valuable mall properties in the world. It operates high-end malls, including those under The Mills brand, and also has the largest market share in outlet shopping with its Premium Outlets properties.

Simon isn't immune to the trouble that some mall-based retailers are facing, but it sees that as an opportunity -- especially when it comes to vacated department-store spaces. Simon's general business model is to create mixed-use destinations out of its properties, incorporating non-retail elements like hotels, entertainment venues, apartments, high-end dining options, and more. The idea is that these will create more foot traffic for retail tenants and create valuable space. And the results have certainly been promising: Simon's retailers reported a year-over-year gain in average sales per square foot in 2019.

2. Tanger Factory Outlet Centers

Tanger is the only publicly traded pure-play outlet-shopping REIT. Outlet shopping has less to worry about from e-commerce than most other types of discretionary retail because of its discount, treasure-hunt nature. Plus, with most outlet malls being open-air, it's a more natural fit for social distancing measures, and demand could come back more quickly than with enclosed types of retail.

In addition, Tanger is doing a great job of adapting to the changing retail landscape. For example, the company recently announced the launch of its Virtual Shopper Concierge service, which will allow consumers to hunt for bargains at Tanger's outlets without ever leaving home.

3. Realty Income Corporation

If I were to call one of these stocks the "backbone" of the basket, Realty Income would be it. Notice in the chart above that although it's down in 2020, Realty Income has been the best-performing stock out of the five, by far. And there's good reason for it.

Realty Income focuses on single-tenant retail properties in recession-proof industries. Dollar stores, warehouse clubs, and convenience stores are just a few examples. These are businesses that have largely been open during the pandemic and have little to worry about from e-commerce disruption. In fact, Realty Income has increased its dividend more than 100 times since its 1994 New York Stock Exchange listing, and its July dividend will be the 600th consecutive monthly distribution to shareholders.

4. EPR Properties

At first glance, EPR Properties may sound like a terrible business to be in right now. The REIT specializes in experiential real estate. Its largest property type is movie theaters, and there are also waterparks, ski resorts, golf attractions, and more.

However, there are some reasons to invest in EPR while the pandemic is still going on. For one thing, the company has tons of liquidity. In fact, at EPR's current rate of cash burn, the company has enough money to survive for more than five years while collecting just 15% of its rent.

Its tenant properties are generally reopening faster than expected, and demand has been strong. At the REITWeek conference in early June, EPR reported that its TopGolf tenants that had opened were seeing a year-over-year increase in walk-in traffic to their properties.

5. Seritage Growth Properties

Seritage is the most speculative stock on the list, but the value-creation potential is just too large to ignore. Seritage was created for the specific purpose of taking properties formerly occupied by Sears and redeveloping them into modern, mixed-use assets. Most Sears properties were the premier shopping destinations when they were built, so this is a portfolio of assets in some excellent locations with lots of value-creation potential.

Obviously, redeveloping a portfolio of more than 30 million square feet is a capital-intensive process and has tremendous execution risk, even when there's not a pandemic going on. But if Seritage is successful, there's huge potential to create value.

What I expect

To be clear, I'm not trying to say that the worst is over for any of these stocks (or the market as a whole), or that the path upward will be a smooth one. Quite the opposite. I completely expect a roller-coaster ride in all of these stocks for as long as the pandemic lasts, and even longer if there's a long-tailed effect on consumer demand.

Having said that, I'm confident that these are five well-run businesses and all of them have competitive advantages that should produce excellent long-term returns for investors, especially at today's depressed valuations.