2 Great Retail REITs to Buy in 2022

Many investors have been hesitant to invest in any physical retail stocks, but there are still some excellent opportunities. In this Fool Live video clip, recorded on Jan. 14, Fool.com contributors Matt Frankel and Jason Hall give their top retail real estate investment opportunities for 2022.

Matt Frankel: Moving onto retail, everybody's favorite topic. Why would we want to invest in any retail stocks right now, Jason, why?

Jason Hall: First of all, I think it's so misunderstood and I think there's so much really valuable retail out there. The idea of the death of brick-and-mortar. I just think it's so grossly underrated and understated and that's one of the reasons that I like the company that I'm going to talk about, and that's Retail Opportunity Investments Corp (ROIC 1.70%), ROIC. So ROIC is definitely a niche player, but they are playing in a very big niche. That's West Coast-based high-value strip malls that have an anchor tenant, that's grocery pharmacy, something like that, it's relatively e-commerce resistant. Even if it has a good e-commerce business, it serves a value because it's the local distribution point which you need for grocery.

So, it's a really interesting business. They focus on the West Coast. They focus on the high traffic, high value. Being in the right areas with the right demographics. You see some of the numbers, owns 86 shopping centers, just under 10 million square feet, almost 2,000 tenants and their lease rate is 97%. The bottom line is that those e-commerce resistant anchor tenants make all of the other potential spaces in those properties valuable. If you're a salon, if you're a restaurant, if you sell pet food or some other little type of small business, there's a lot of value having a high-traffic anchor tenant right there because it drives business to you too. I love them. Stuart Tanz has been a great CEO. He's been doing this for 25 years and he's been really successful.

Frankel: My pick is Store Capital (STOR), which isn't that far off.

Hall: Matt, that was my number two.

Frankel: Ticker symbol is STOR, stands for Single Tenant Operational Real Estate. The biggest difference, as the name implies, single-tenant instead of anchored shopping centers. Store Capital has $3 trillion dollars' worth of properties in its target basket that it could potentially go after. If you're familiar with Realty Income (O 1.71%), which is a much more popular version of essentially the same business model, Store Capital focuses more in the middle-market as opposed to A-class properties. The cost of capital advantage here is phenomenal.

So let me just show you one thing. They're investing aggressively right now and here's why. If you look at this, this is the first nine months of the year. The fifth bullet point down is that they invested $1 billion in properties at an initial cap rate of return of 7.7%. Go down to that last bullet in that section. They issued debt at 2.8%. So, they're making a 7.7% initial yield on their properties. They are paying 2.8% average on their debt. That's a fantastic spread between your cost of debt and your initial returns. Especially since a lot of healthcare and office and industrial properties, that initial cap rate is in the 3%-4% percent range right now because interest rates are so low, that's not the case in mid-market retail.

They have great capital advantages. If you look at a long-term chart of Realty Income's performance, which has been around much longer, it has handily beat the market over time. I think Store is going to do the exact same thing.

Hall: It's a dividend aristocrat too.

Frankel: Yeah.

Hall: I think Store Capital will be as soon as it gets to that 25-year mark.

Frankel: Only REIT that Warren Buffett owns in Berkshire Hathaway's (BRK.A 0.77%) (BRK.B 0.93%) portfolio, by the way.

Hall: There you go.