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2 Retail REITs You Can Buy and Hold for the Next Decade

By Marc Rapport – Nov 14, 2021 at 6:01AM

Key Points

  • Federal Realty Investment Trust has consistently increased its dividend for decades.
  • Simon Property Group is the king of the malls.
  • Each has deep experience and a portfolio that's well-positioned for the future.

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Federal Realty and Simon Property Group look good now and going forward.

With the world developing more and more weapons to fight COVID-19, buying shares of retail businesses that depend on a physical presence may again be compelling, especially for long-term investors.

Two to consider buying and holding for the next decade are Federal Realty Investment Trust (FRT) and Simon Property Group (SPG 1.80%). Both are real estate investment trusts (REITs) that have weathered years' worth of e-commerce erosion on brick-and-mortar properties -- which grew worse during the pandemic shutdowns -- but they have very different portfolios and stories to tell.

A grocery shopper looking at vegetables in the produce section.

Image source: Getty Images.

Federal Realty is a Dividend King

Federal Realty Investment Trust is one of the Dividend Kings, a group of 31 stocks that have raised their dividends for at least 50 consecutive years. Based in North Bethesda, Maryland, the company owns or has interest in 105 retail real estate properties, primarily community and neighborhood shopping centers and mixed-use spots in metropolitan markets across the Northeast and Mid-Atlantic regions, South Florida, and California.

Grocery stores are the typical anchor of Federal Realty's shopping centers, while its mixed-use properties are usually anchored around retail but include various combinations of office, residential, and hotels, all with a diverse range of sole proprietorships to national brands. Not particularly glamorous, but solid.

Federal Realty said it collected 96% of its rents during the third quarter, which was better than expected. And funds from operations (FFO), a critical measure of REIT performance, came in at $1.51 per share, a 35% jump from the third quarter of 2020.

Prospects look good going forward, too. For example, the company said that it completed 119 retail leases for 430,000 feet of comparable space at 7% higher cash basis rents than the leases they replaced, and that there were fewer tenant failures than expected.

"We didn't anticipate the bounceback in nearly all facets of our business to be so fast and so strong, even with the effects of the Delta variant surge," CEO Donald Wood said in the company’s latest earnings call on Nov. 4. "We sit here in the first week of November 2021 … feeling great about our market position."

At Friday's close, Federal Realty's stock was just 3.5% off its recent high, but its annual dividend of $4.28 per share was good for a 3.3% yield.

Simon Property Group is the king of the malls

Indianapolis-based Simon Property Group owns, develops, and manages a portfolio that, as of the end of the third quarter, comprised 233 properties covering 189 million square feet in North America, Asia, and Europe. Tenant occupancy and sales have been rising, and rents are getting paid again -- and the market has noticed the turnaround.

Simon, too, is trading about 3% below its recent high, but with a $6.60 annual dividend, it's yielding a hair under 4%. And it's gained about 10% since its third-quarter earnings announcement on Nov. 1, when it reported that net operating income had increased 34.3% from the same period the year before, and, critically, FFO was up 52.7% to $3.13 per share this quarter from $2.05 a year before. That inspired an increase in full-year 2021 guidance and another dividend increase.

The company's dividend history is indeed promising. After cutting it down from $2.10 to $1.30 in mid-2020, Simon has raised it the past three quarters to the current $1.65 per share. And it never stopped paying a dividend, as some other REITs did last year.

Also promising is Simon's moves to bolster its own business both through acquisition -- including, notably, Taubman Centers late last year -- and through investing in the businesses that fill its retail spaces, such as JCPenney.

Why these two retail REITs could see a decade more growth

This year's rally among retail REITs flies in the face of any conventional wisdom that says retail is dead, especially malls. At least for now. The National Association of Real Estate Investment Trusts (Nareit) places 29 REITs in the retail vertical and says that as of Oct. 31, they were yielding 3.9% and had a year-to-date total return of nearly 43% after a miserable 25% loss in 2020. Simon Property Group has far exceeded that, with a one-year total return of 150% as of Friday's close, while Federal Realty Investment Trust was 56% ahead at the same point.

Those are all strong numbers -- for the sector and these two companies. But we're comparing recent performance against some epically dismal stuff happening last year at this time. Will that continue? No one knows, but Federal Realty and Simon Property Group have the portfolios in place and the history and experience behind them to provide reason to believe the next decade could be very good for them and their investors.

Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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