Investors are in a fearful mood today. The bear market of 2022 is both a sign of that fear and a driver of it. When Wall Street is in a broad downturn like this, however, the baby can sometimes get tossed out with the bathwater. That seems to be exactly what's happening with Simon Property Group (SPG 0.05%), which is trading down nearly 38% year to date, and Federal Realty Investment Trust (FRT 1.26%), which is down about 33%.
Let's take a look at why these two leading retail real estate investment trusts (REITs) are solid long-term investments that are currently too cheap to ignore.
1. Simon Property Group: Getting ready for new tenants
It's easy to hate on mall REITs since the coronavirus pandemic pushed a number of the industry's big names into bankruptcy court. Things got bad enough that even industry giant Simon Property Group ended up trimming its dividend by a hefty 40% or so. And that doesn't even take into consideration the concerns surrounding online shopping, which was an issue well before the global health crisis.
Image source: Getty Images.
But there are some indications that malls are making a comeback, now that the weakest locations are falling out of the market. Notably, Simon owns some of the best malls and outlet centers in the world. The real proof of the company's strength, however, is showing up in its financial results. For example, in the second quarter of 2022, Simon noted that occupancy rose more than 2 percentage points year over year to 93.9%. Management actually increased the midpoint of its guidance for the full year.
A key piece of the puzzle is that the company's direct customers, which are retailers, continue to lease space. CEO David Simon summed it up during the second-quarter 2022 earnings conference call by saying, "Demand for our space is extremely strong."
But the important fact, which came from a question later in the call, was when the CEO said, "And this is really, really important for everyone to understand: We're very optimistic because a lot of the leasing that we've done really doesn't open until [2023 and 2024]."
In other words, the market is downbeat on a company that expects strong results this year, next year, and the year after that. Meanwhile, you can collect a huge 7.3% dividend yield that has now been increased five times since it was cut.
2. Federal Realty: Investing in new assets
Federal Realty, which specializes in strip malls and mixed-use properties, isn't a direct competitor to Simon, but it has some key similarities. Most notably, like Simon, Federal Realty focuses on owning properties in wealthy regions with higher population density.
This REIT also has a fairly concentrated portfolio relative to its more-direct strip mall peers, since it prefers to focus on quality over quantity. And it takes an active approach to its real estate, buying, redeveloping, and selling assets if it can get a good price.
Put all of this together and you get a REIT that has increased its dividend annually for 55 consecutive years. That is longer than any other publicly traded REIT. Clearly, the approach that the company has taken is successful.
For example, as the 2020 pandemic played out, Federal Realty went in search of new investment opportunities. It found a handful of properties to buy at attractive prices, including two in up-and-coming Arizona markets.
Basically, it strengthened its business during the pandemic and expanded into a new geographic region (Arizona). That is exactly what you'd like to see happen. And all of the new properties it added have redevelopment potential, which will help drive long-term growth. Meanwhile, Federal Realty saw record levels of leasing activity, which means strong results over the near term as well.
With the stock trading down along with the market, long-term investors in search of reliable income shouldn't miss out on the historically generous 4.8% yield now on offer. This industry-leading name doesn't go on sale very often.
Irrational can be a good thing
Long-term investing is hard work because you have to deal with the often irrational behavior of the market. But if you can think in decades and not days (or minutes and seconds), bear markets can be times of great opportunity. Right now, Simon Property Group and Federal Realty look too cheap to ignore. You might end up being a little early, but it's usually better to be about right than miss a good opportunity trying to time a market bottom.
