Will Retail REITs Rebound in 2021?

Real estate has been one of the worst-performing parts of the stock market during the COVID-19 pandemic, and with stay-at-home orders, mandatory closures, and reduced-capacity protocols, it's easy to see why. But is the worst behind us? In this Fool Live video clip, recorded on Jan. 19, Millionacres real estate analyst Matt Frankel, CFP, and editor Deidre Woollard discuss whether we might see retail REITs rebound in 2021. 

Deidre Woollard: As we wrap up, let's just talk about retail quickly. For 2020, returns down 25.2%. They were the biggest loser on the Nareit list as far as returns. We all know why that happened, and we also know why it's going to continue to happen for a little while. There was this shift to reliance on e-commerce, traffic has come back a little bit. I know Matt, you had post I read the other day on Tanger Outlets (SKT 0.07%) and that their foot traffic hasn't quite come all the way back yet. I don't think we're done with the Chapter 11s of retail brands by a long shot. There's some concern here. At the same time, we're also seeing that people are ready to go out and shop again, and that that could be something that lifts these stocks up in 2021.

Matt Frankel: Yes, it was Tanger Outlets is the one you were referring to, ticker is SKT, if anyone's interested in that. They've come back tremendously lately. I think they've tripled since the lows. The reason for that is, I want to say September, they reported that customer traffic had been at 99% of normal levels, which that's amazing, but that was during the summer. Fast-forward a few months and COVID is rearing its ugly head again in large numbers, and now it's down to 90% of previous levels, which is still pretty impressive for a retailer right now. I went in the mall not that long ago and it was not 90% full. The fact that their properties are operating at 90% of normal customer traffic is pretty impressive. Having said that, just people seem a lot more hesitant to shop right now than they were a few months ago. It's not just because the winter season has rolled around and the holidays are over, which is historically a pretty slow time for retailers, but the COVID cases are spiking. This is my thought too, it's silly to go and risk it when a vaccine is right there. It just seems like a quick correction, if you will. It's like the last dip before things can start really getting back to normal. I don't think that we've seen the last of the bankruptcies. I think the bankruptcies will be more predictable going forward. When I mean predictable, think of when RadioShack went bankrupt, there wasn't anyone who didn't see that coming.

Woollard: Yeah.

Frankel: When J.Crew went bankrupt, that caught people by surprise this year. There were a few this year that surprised people and snuck up on you that COVID accelerated. We're not done, the retail bankruptcies, the shift toward e-commerce is not done yet, but I think it'll be a little more predictable going forward. I think consumer tastes are changing and you're going to see a lot of the weaker retailers, they got shaken out of the market in 2020. I think the bankruptcies will return to at least a pre-COVID level, which was already pretty bad, and I think you're going to get back to that level. A lot of retail REITs are using innovative ways to fill their space. Tanger mentioned looking into places that need larger spaces. They mentioned big furniture retailers. Just name a few of the companies that went bankrupt like Ascena Brands, which I think is Ann Taylor is their parent company. They went bankrupt. J.Crew went bankrupt, and Brooks Brothers went bankrupt this year. If all three of those properties closed in a Tanger Outlet, one furniture store could take all that space and make up for it. They're going after the high square footage retailers that can really make a dent in their vacancy level. Places like Simon Property Group (SPG -0.06%), SPG, they're looking into diversifying away from retail in general. They're adding hotels to a lot of their properties. They're adding office spaces like the one I'm in right now. They're adding all kinds of non-retail elements; restaurants you normally wouldn't find in a mall, entertainment venues, the Simon mall by you has a casino in it. They're really trying to not rely on traditional retail sales and have these other things be a natural source of foot traffic for their retail sales. But the point is, a lot of these retail REITs are really taking proactive steps to adapt ahead of time. Yes, bankruptcies are terrible, but if you have a plan for them, it's a lot better than if you just let your mall becomes vacant like the ones that went bankrupt this year were doing. You had a CBR and Pennsylvania Real Estate Investment Trust (PEI). Or CBL rather and Pennsylvania Real Estate Investment Trust who went bankrupt. When a retailer closed they just stayed empty space. The retail rates aren't letting their space just stay idly vacant and are thinking outside the box when you think about it. Those are the ones that I'm interested in putting my money in.

Woollard: The other thing to talk about too is the essential retail. People are asking about STORE Capital (STOR) and realty income ticker. We saw that those rates tended to be a little stronger over time when so many other things were closed.

Frankel: Yeah. Those are -- a lot of essential businesses are still being down because a lot of their portfolios are not essential businesses like movie theaters are big part of STORE Capital's portfolio. Realty Income (O 0.24%) too has a big movie theater presence. They have things like day care businesses and child care centers, things like that. They're not totally immune. They have long-term leases and net leases, which are a nice differentiator. It's different than mall retail in that the businesses that make up most of those portfolios are drugstores or vehicle service centers. There are things that people need and there are things that are generally needed no matter what the economy is doing, even in a pandemic. Like STORE Capital, two-thirds of their portfolio is essential businesses which is why their rent collection never really dip below 70% even at the worst of the pandemic. So It's really served as a nice, I don't want to say a tailwind, because they are just paying what they normally would, they're not making any more money off these businesses. But it's a nice little safety net in these times. Pretty much everything in STORE'S portfolio is open now except some of the movie theaters. I think they're reporting that the biggest source of their non-collected rent right now is movie theaters, which is only about 6% of the portfolio. They are not quite reopened yet. Other than that, these businesses are really popped back up, but their stocks really haven't shot back to pre-pandemic levels.