Retail REITs Are Up 32% This Year -- Could They Climb Even Further?

Retail real estate investment trusts, or REITs, have handily outperformed the overall stock market this year. While some of the reopening is already priced in, Millionacres real estate analyst Matt Frankel, CFP, doesn't think the gains are done just yet. In this Fool Live clip, recorded on June 15, Frankel and editor Deidre Woollard discuss why retail REITs have done so well, and why they could have more room to outperform in the months and years ahead. 

Deidre Woollard: Overall, retail returns for retail REITs up 31.58%. Shopping centers up 42.86%. Regional malls up 51.36%, and the freestanding retail only up 11.17% and that's because it was only down by 10.46% in 2020, whereas overall retail was down by 27%-30%. Definitely there's full on turn on retail REITs that we've been seeing.

Matt Frankel: I'm glad you brought that up because I've gotten this question several times on live shows and through emails and stuff like that over the past few weeks. I always talk about the retail stocks and travel stocks, things like that. Isn't the good news priced in at this point? Just like you mentioned, the gains have been absolutely fantastic. I want to quickly share my screen if I may.

Woollard: Go for it.

Frankel: Can you guys see that?

Woollard: Yeah.

Frankel: I wrote this almost exactly a year ago. I got a lot of "OK boomer" comments for articles like this a year ago when everybody else was recommending Zoom and Teladoc and things like that, and I was writing about retail REITs. I want to show this for the "OK boomer" crowd in a second. [laughs] But like you said, I basically offered a basket of five stocks that were going to be just fine. Simon Property Group (SPG 0.05%), Tanger Outlets (SKT -0.56%), Realty Income (O 1.94%), which is one of those freestanding REITs you were just talking about, EPR Properties (EPR -0.03%), and Seritage Growth Properties (SRG 0.65%). At the time, you could see in the table, these were the stock prices about a year ago when we were in the middle of the COVID crisis, no one knew whether safe and effective vaccine was coming, no one knew if we would ever be able to safely shop in the same way again. Now you could see on the right side of your screen, these are the current prices as I'm talking. Simon Property Group has more than doubled, Tanger Outlets has more than tripled, Realty Income, like you said, the freestanding ones certainly up by 10% or so. EPR Properties is up 60% right there, and Seritage has nearly doubled since then. It's definitely a fair question when people ask, is all this growth priced in already at this point? Tanger has tripled. Isn't that reflective of what's going on? What I'd say to that is stocks are indicative of the best information we have at the time, other than the mean stocks which trade on other factors. At the time, we didn't know if people were going to be able to go to outlets again. Now we do. What I would say is this. Since about November of last year, everything having to do with the reopening has really surprised to the upside. When Pfizer's (PFE 2.40%) initial vaccine data came out, it was better than we thought it was going to be. When the vaccine rollout happened, it's gone faster in the U.S. than we thought it would be. There were some experts who thought that vaccines wouldn't be widely available till September, so that's been better than expected. New York announced today that they were fully reopening. No one thought that would happen in June. It really surprised people to the upside, and if it continues to be an accelerated reopening, the economy is strong as people are expecting, and then some, which I think it will surprise to the upside this summer, just from having been out and about. I could tell you, traffic is right where it was before the pandemic. It's back.

Woollard: Mall parking lots are full.

Frankel: The easy traffic is over, the easy commutes are gone. I'd say, be careful when you say that the gains are already priced in. The current situation is priced in, where we know we've avoided the worst-case scenario. We know that not enough, but a fair amount of the American population is vaccinated. We know that pretty much every major population center is now reopened or is planning to in the near future. We don't know how good everything is going to do now that everything is reopened. Like I said, New York just announced their reopening today fully. We don't know how that's going to translate into retail sales. We don't know how that's going to translate into tourism demand right away. If things keep surprising to the upside, there could be a lot more room for these to grow.