Through good times and bad, the best retail real estate investment trusts generate reliable earnings, which grow over time and allow the company to grow their dividend like clockwork.
Retail REITs own and manage portfolios of retail-focused real estate: malls, shopping centers, convenience stores, and so on. For most investors, a high dividend yield -- which normally ranges above 3% -- is what makes these companies attractive.
Here's the catch: REITs pay out an eye-popping 90% or more of their taxable income to shareholders. This is great when times are good, but if earnings fall their dividend will likely follow. So, to capture that dividend, you need to focus on the best in the business. Here are three:
1. Realty Income (NYSE:O)
What separates Realty Income from the pack is a management team that has established a clear mission and has consistently executed on that vision. Here is how the company's CEO, John Case, explained it in his 2014 letter to shareholders: "Our mission of generating dependable monthly dividends that grow over time requires consistent performance and if that is 'boring,' then we are 'good' with that."
The company carries out that mission by signing tenants in stable industries to long-term leases (10 to 20 years). For instance, Realty Income currently owns 4,327 properties diversified among dollar stores, convenience stores, drugstores, quick-service restaurants, wholesale clubs, and the like.
The beauty of these businesses is that selling necessities, or operating at a lower price point, reduces their vulnerability to e-commerce and swings in the economy. Moreover, signing companies to long-term leases helps to keep properties occupied and cash flow predictable.
However, there is nothing stopping other REITs or private equity firms from targeting similar properties. Rather, what makes Realty Income unique is management's disciplined approach and willingness to stick to what works, and the proof of this is in the pudding. Realty Income has raised its dividend for the last 69 consecutive quarters and for 20 consecutive years.
2. National Retail Properties (NYSE:NNN)
I mentioned that other companies could, and do, invest in properties similar to those owned by Realty Income, and National Retail Properties is one. In fact, National Retail -- which currently owns 2,054 similar properties -- uses the same business model.
But, again, it's not the long-term leases or the types of tenants that make a company successful. It is about having a disciplined management team that can execute its business plan. By increasing its dividend for 25 consecutive years, National Retail has certainly proved it can follow through.
It's fair to wonder, though, why consistently raising the dividend proves a company can execute. Here's the reason: Before a company can even consider paying a dividend, it needs to pay its employees, expenses, and debt -- basically, dividends come last. Consistently increasing its dividend, through good times and bad, shows that National Retail has managed its debt and expenses exceptionally well, and has consistently grown earnings. For me, that is the sign of a great company.
3. Tanger Factory Outlet Centers (NYSE:SKT)
As the company's CEO, Steve Tanger, has said, "In good times people love a bargain, and in tough times, they need a bargain." By developing the outlet mall concept in 1981, Tanger Factor Outlets gave retail businesses a way to turn out-of-date and overflow merchandise into cash, and a way for customers to score great deals on their favorite brands. Today, Tanger owns 44 outlet malls located near some of the most visited vacation spots in the U.S. and Canada.
Most important, by operating in this business for decades, Tanger has built a brand. The company doesn't need to convince customers that they will get a great deal, they know; and it doesn't need to convince tenants that customers will come, because they have been flooding in for decades. This gives Tanger the upper hand when it comes time to negotiate rent.
The combination of operating at a lower price point -- which makes the company less vulnerable to e-commerce and swings in the economy -- and having a recognizable brand name to attract customers, gives Tanger a competitive advantage over the competition. This advantage has allowed Tanger to steadily grow earnings over time, and to reliably increase its dividend for the last 20 consecutive years.