Real estate investment trusts (REITs) that own retail-focused properties have been suffering, with some of the biggest names still down 20% or so from their pre-coronavirus levels. Investors are clearly concerned that landlords like National Retail Properties (NNN 0.81%), Federal Realty Investment Trust (FRT), and Simon Property Group (SPG -1.09%) are not done suffering. That's actually a fair assessment -- but the future could be brighter than Wall Street thinks. Here's a quick look at each of these REITs.
1. A one-by-one approach
National Retail Properties is what's known as a net-lease REIT, which means that it owns single-tenant properties where its tenants are responsible for most of the operating costs. It generally buys buildings from companies and then leases them right back under long-term agreements. This is a win/win -- National Retail gets a new property, and the seller gets cash that it can use to grow its business while continuing to use the property, which is generally in a highly productive location.
The problem for National Retail is that it's entirely focused on U.S. retail assets. That was terrible in the early days of the pandemic, with the company having trouble collecting even 50% of its rents. But that was months ago; by the end of 2020, rent collection rates were back up to roughly 95%. In fact, for the full year, National Retail managed to collect roughly 90% of what it was owed. So while business was rough at one point, it has improved greatly.
With over three decades of annual dividend increases under its belt and a 4.6% yield that's toward the higher end of its 10-year range, National Retail might be ready for more attention from long-term investors. The one caveat is that there's little diversification in the REIT's portfolio. If you can handle a laser-like focus on U.S. net-lease retail, however, it is worth a close look.
2. A dividend king
If a three-decade-long dividend streak sounds good, how about one that's lasted more than five decades? That's how long Federal Realty has managed to reward investors with annual dividend hikes, which the company claims is the longest uninterrupted string of annual dividend increases in the REIT sector. In fact, it's twice as long as necessary for the stock to be classified a Dividend Aristocrat, which makes it a Dividend King.
Once again, however, Federal Realty's stock is still well off its pre-coronavirus highs. In fact, if you look back a bit further, it's actually around 40% below its 2016 highs. The concern is that its collection of around 100 shopping centers and mixed-use developments will have trouble navigating the shift toward online shopping. And the coronavirus accelerated that trend.
While there's some reason to be worried, Federal Realty's portfolio is well located in population-dense areas with wealthy residents. And they generally house things people use on a regular basis, from grocery stores to hair salons. Like National Retail, rent collections are also bouncing back.
That said, the next couple of quarters are going to be tough. Federal Realty is projecting occupancy to fall into the high 80% range before starting to recover in the back half of 2021. So this isn't a risk-free investment. However, its 4% yield is historically generous, and the REIT has seen solid demand for its properties. It just takes time to retenant. If you can handle the wait, though, Federal Realty could have a place in your dividend portfolio.
3. A dividend cutter?
The last name up is Simon Property Group, which owns around 200 enclosed malls and factory outlet centers. The pandemic was not kind to this REIT or its investors, who got hit with a nearly 40% dividend cut on top of a material stock decline. But humans are social beings, and shopping is one of the world's favorite pastimes. While there are many malls that will not make it through this downturn, the ones that remain will likely become more valuable to retailers and customers. Think of it as a reverse network effect. And most of Simon's malls are well located and highly productive.
Simon Property Group has also been here before: It was last forced to cut its dividend during the 2007-2009 recession. During that period it worked to improve its industry position, and it came out stronger than when it entered. The REIT is doing the same thing this time around, including buying a competitor with an impressive collection of malls (Taubman Group) and using bankruptcies to invest in iconic retailers like Brooks Brothers and J. C. Penney.
It may take some time for Simon to get its properties filled again, since retenanting a mall requires extra effort (malls are complex ecosystems that need careful maintenance). But it is too soon to suggest that in-person shopping is dead, and Simon is probably the best-positioned mall REIT you can buy today. In fact, if the last dividend cut is any indication, a period of strong dividend growth could be on tap once the world learns to live with the coronavirus. Meanwhile, you can collect a generous 4.4% yield while you wait for the turnaround.
Tough to own
Owning retail-focused REITs isn't exactly easy right now, and really conservative investors might not want to do it. That's understandable, given that there are still material headwinds from the coronavirus to deal with -- on top of the increasing use of online shopping. However, you can often find the best bargains in unloved sectors, and National Retail, Federal Realty, and Simon are all industry-leading names that have proven they know how to survive tough times. It takes some resolve to invest here, but giving up on these stocks could be a major mistake.