The economic shutdowns being used to slow the spread of the coronavirus pandemic have been particularly hard on retail-focused real estate investment trusts (REITs). However, if you are looking at the sector, some players are better positioned as we transition into 2021 than others.
STORE Capital (STOR) and Federal Realty Investment Trust (FRT) are great examples in the sector because of the issues they are facing right now. Here's which one is better positioned for the new year.
It's going to get worse
Federal Realty is an iconic real estate investment trust with over five decades of annual dividend increases under its belt. You don't achieve a record like that by accident -- you do it by operating a well-run business through the inevitable ups and downs of the economic cycle. Federal Realty's portfolio of around 100 strip malls and mixed-use developments are definitely facing a downturn at the moment, and it is only collecting around 85% of the rents it is owed.
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The REIT is highly unlikely to go out of business because of COVID-19, but that doesn't mean that moving past the pandemic will be easy or quick. In fact, the company's occupancy, which was roughly 92% at the end of the third quarter, is likely to fall further before eventually stabilizing. That's not just analyst conjecture -- management said during Federal Realty's third-quarter 2020 earnings conference call that it expects this key metric to decline into the mid-to-high-80% range. Put simply, things are likely to get worse before they start getting better.
Still, there's room for optimism. During the same conference call, the REIT noted that it was fielding calls from potential tenants that want to move to its properties from nearby locations owned by Federal Realty's competitors. In essence, they want to use the downturn to upgrade their locations. So Federal Realty's highly curated portfolio, located in densely populated and wealthy areas, is still highly desirable. It will just take some more time to navigate the difficulties caused by the coronavirus. And that means 2021 will start on a dour note and may see only modest improvement as the year progresses.
Getting back to normal
STORE Capital is a bit different than Federal Realty, in that it's a net-lease REIT. That means it owns single-tenant properties where the lessee is responsible for most of the operating costs. The REIT owns nearly 2,600 properties and has a penchant for inking its own lease terms via sale/leaseback transactions. So it has a deep knowledge of its assets and lessees.
During the worst of the downturn, rent collection got fairly low, falling into the high-60% range in May of 2020. That number was up to 90% in October, which gives it an edge over Federal Realty. However, there's another piece to the puzzle: Federal Realty's strip malls cater to a collection of large and small retailers all housed within a single property. STORE, on the other hand, deals with single tenants at all of its assets, usually with very long leases (averaging around 14 years) at good locations (which it helps ensure by originating its own leases). Its occupancy was 99.6% at the end of the third quarter, with no particular reason to expect a material decline.
In other words, STORE Capital appears much better positioned as we look to flip the calendar from 2020 to 2021. That doesn't mean the REIT won't have to deal with additional headwinds from COVID-19. But it will be doing so from a position of strength compared to Federal Realty, which has basically stated that the rough patch it is dealing with isn't going to let up just yet.
Paying up
Wall Street is aware of this situation. STORE Capital's shares fell as much as 60% during the worst of the early 2020 bear market, but are now off by just 13% or so for the year. Federal Realty's shares are still off by about 33%. STORE's dividend yield is roughly 4.3%, compared to 4.8% for Federal Realty. For more conservative dividend investors looking at this pair, STORE is probably the better option.
That said, those with strong stomachs and a long-term outlook shouldn't write Federal Realty off -- it's a very well-run REIT, and the yield hasn't been this high since the 2008-09 recession. Indeed, the Dividend Aristocrat looks like it's on sale, and its long-term prospects are still pretty solid. It's just not going to be a fun ride for investors over the next few quarters.
