5 Great REITs to Play the Economic Recovery

There are some areas of the stock market that obviously stand to benefit as the COVID-19 pandemic begins to wind down in 2021. For example, we all know that cruise lines, airlines, and hotel operators should see their business pick up dramatically once a vaccine is widely available.

However, one often overlooked sector when it comes to choosing the best "reopening stocks" is real estate. Since many types of commercial real estate rely on people being willing and able to physically go places, many real estate investment trusts -- or REITs -- were some of the hardest-hit stocks in the market as the pandemic swept across the world. But on the other hand, some of them could also be big winners as the world starts to get back to normal.

In this Nov. 30 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss five REITs in particular that could be big winners in 2021 and beyond. 

Matt Frankel: Okay, so there's five companies in the basket and I'll go through briefly to give you a one second -- or one sentence -- description of what they do. You have Simon Property Group (SPG -0.06%), ticker symbol is SPG. They are the largest mall REIT in the country. They own seven of the ten most valuable malls in America. They invested in the Class A malls. They're big time malls, these are the high-end properties. You've Tanger Factory Outlets (SKT 0.07%), which is ticker symbol SKT. They are the only pure play outlet shopping REIT in the market. The big open-air outlet shopping attractions. They're mainly in touristy areas. I know JCs from South Carolina, there's one in Myrtle Beach that I know of and Charleston has one. Number 3 is the Realty Income Corporation (O 0.24%), which I'd call that the backbone of the basket. Their ticker symbol is O. They do well in pretty much any type of economic environment. Even in the pandemic, most of their tenants are essential businesses, so they held up really well. Fourth is EPR Properties (EPR -0.10%), they call themselves the experiential REIT. I know a lot of people will roll their eyes when I say this, but about almost half of their properties, are movie theaters. They also own Topgolf is a big tenant of theirs. They have waterparks in their portfolio. They have ski resorts, Dell Resorts is a big tenant of theirs. They're experiential properties. Service businesses are a form of retail. Restaurants are a type of retail business, anything that sells a services is usually a type of retail. Fifth, last but not least in my mind, is Seritage Growth Properties (SRG 0.11%), which is a REIT that Warren Buffett wholeheartedly believes in, he is actually their biggest individual shareholder, he himself, not Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B).

Jason Moser: He knows a few things.

Matt Frankel: He knows a thing or two. This is a REIT that was created specifically to buy a portfolio of old Sears properties, to renovate and turn them into things other than Sears. Because even Sears didn't want to own Sears, that's why they created Seritage. They are gradually developing this portfolio to premier retail centers. Because if you remember, when Sears were built back in the day, there were some of the most premier shopping destinations in town. They are in great locations, for the most part, run down buildings, but in great locations. So the theory is that if you turn those integrate retail assets, then you'll have premier assets in premier locations and it's a winning combination. Those are the five. Since I put out that article in June, a lot has happened obviously. When we first started the retails as the dead basket, it looked like we were going to reopen with no problems in June. That's when that big second-wave hit. So the big second wave hit right after I put out this article and maybe look like an idiot.

Jason Moser: Just bad timing, that's why.

Matt Frankel: It was bad timing. But since then we've had the vaccine news has come out as positive. People are starting to realize that these companies aren't going bankrupt. They are all in good financial positions now. Since that time the S&P is up by 22 percent. Put that in context. So the market has done pretty well. So that's been a driving force too. Just running through some of these numbers, Simon is up by 44 percent since that time. On the heels of good vaccine news, they modified their merger agreement with Taubman Centers (NYSE: TCO), if you remember?

Jason Moser: Oh yeah.

Matt Frankel: At a cheaper price than they were originally going to get. So they acquired one of their biggest competitors for a pandemic price, which is a good thing. Tanger Outlets is up by 47 percent. They recently said that traffic through their properties, not necessarily sales at the retailers, but traffic through their properties is 99 percent of last year's levels. That's pretty impressive for our retail REIT right now. The holiday shopping season is a great time for outlets historically and Tanger is in a good position because their properties are outdoors for the most part. They're very conducive to social distancing, it's not the crowded mall atmosphere, you can get your own space, ventilation and things like that so people are more comfortable going and the numbers are showing that. They also have a ton of cash on hand to not only make it through the tough times, but to pursue opportunities as they come up. Outlet shopping is still a pretty small industry, some room to grow. Realty Income, if you're going to buy one of them, that would be the one I would say just because they are like I said they own mostly essential businesses, Dollar stores are a big part of their portfolio, drugstores like CVS (NYSE: CVS) and Walgreens (NASDAQ: WBA) are big tenants of theirs, convenience stores, warehouse clubs. Anyone who has been to a Costco (NASDAQ: COST) lately knows that they are not earning. In Columbia anyway, that's the only place you can find toilet paper right now, by the way.

Jason Moser: Oh, no. Are we getting back to the days of hoarding toilet paper?

Matt Frankel: Mr. Moser has been to a store lately. Yeah, they're all out.

Jason Moser: Well, I tell you what, I started thinking about that maybe a couple of months ago. I mentioned something with my wife and I said I want to go and order two big boxes from Amazon (NASDAQ: AMZN) because I just don't trust the people won't start freaking out again. They just taken all that stuff off the shelf.

Matt Frankel: See that's why the stores are out, because it's all adjacent sales.

Jason Moser: I'm going to resell it and what is that word, profiteering?

Matt Frankel: Costco has done a great job of keeping items like that in stock, which is why they've been doing great. Realty Income's only up by eight percent since I wrote that just because they weren't beaten down that much in the first place.

Jason Moser: Probably a little bit of a stronger competitive position, it sounds like from the very get go.

Matt Frankel: Right. They were in a good position going into this. They do have some movie theaters, but not a ton. For the most part, they're properties are doing really well. EPR Properties, their properties are not doing well, but that stock is up 20 percent since I wrote that. They've successfully modified their lease with AMC (NYSE: AMC), their biggest tenant, in a mutually beneficial way. It gives AMC a much-needed break on rent and locks them into longer lease terms, so the properties will stay occupied longer. So that's a mutually beneficial for both.

Jason Moser: I got a question for you on EPR real quick. Just a lesson for listeners too. I know EPR pays or paid a monthly dividend and they suspended that dividend for the time being, still paying the preferred dividend I see. Now when a REIT in any position suspends their dividend, what does that do? Is there a time-frame in which they have to reinstitute that dividend in order to be able to keep that REIT status or is it something where if they maintain the preferred then they still maintain that REIT status?

Matt Frankel: Well, the preferred dividends they generally have to maintain or they accumulate enough to be paid in arrears at the end. With your common dividend, it depends on your profits. It specifically recap the pair of 90 percent of their taxable net income. So if a REIT doesn't have taxable net income, which EPR doesn't right now, surprisingly, EPR was profitable in the third quarter. That came as a shock to me and I followed the company pretty closely, a company that's half movie theaters was profitable. But I think they made four cents a share. The dividends they paid out like January and February will cover their obligation for the year.

Jason Moser: Nice.

Matt Frankel: But in 2021, let's say they have a dollar per share of taxable income for the year, they would have to pay out at least $0.90 of share in dividends.

Jason Moser: Got you.

Matt Frankel: It has to do with if they're profitable. There's no time limit if they're not profitable. Seritage, the next one I'm going to talk about. They stopped paying their dividend well before the pandemic. They're not a profitable REIT right now because they are focused on development. They don't have to pay a dividend until they are profitable. Interesting arrangement.

Jason Moser: Very indeed.

Matt Frankel: EPR is up 20 percent. Favorable arrangements with their movie theaters. I know when they had first reopened a lot of their properties, they said, TopGolf traffic was actually up year-over-year because people just wanted to get the heck out of their house.

Jason Moser: That's believable.

Matt Frankel: When the pandemic ended, not when the pandemic ended, when the lockdowns ended that I should say, and things were allowed to reopen in early summer, people just wanted to get out. Those are the types of places they wanted to go.

Jason Moser: The driving range right down the street from our house here, it is constantly slammed. Two stories [inaudible] Fairfax County. But it is very busy at all times of the day.

Matt Frankel: Their properties are getting affected now with the new surge of COVID cases. Some places are doing lockdowns again, things like that. But a lot of their properties are, this is their slow time anyway, like water parks. No one is going to go to a water park right now.

Jason Moser: No.

Matt Frankel: The ski resorts are doing fine because they're conducive to socially distancing and things like that. TopGolf, they're pretty much an outdoor golf attraction. They're not going to get that much business right now anyway. As long as their movie theater tenants are able to make it through the tough times, they'll be fine. They have over a billion dollars in cash. It's worth mentioning. They're not burning through much at all. Like I said, they're profitable now. But they're doing pretty well. That's in my mind, one of the best bargains in real estate at the moment. Finally, Seritage. Seritage has more than doubled off the lows. I guess it's up 65 percent since it was already up in June for the reopening. Seritage, the biggest question is, do they have money to make it through? Unlike all the other ones I mentioned, they do not have billions of dollars on their balance, their big credit facilities or things like that. They rely on their rental income and income from some asset sales to fund their operations. In the start of the pandemic, everyone thought no one's going to buy any retail properties anymore, so they won't be able to sell anything, or tenants aren't paying rent. But now it turns out that wasn't the case and they have a nice little buffer. That's why they're nicely up. As long as they have the money to redevelop their properties, there's a ton of value creation potential. But like I said, they're the least liquid of any of the five REITs I mentioned. But overall, I mean, looking at the returns, three out of the five are over 40 percent up since I made the basket. I'm satisfied with that. It's not the war on cash basket by any means yet. I'm not claiming the title.