Many investors are scared to get involved in any stocks even related to the retail industry, and who could blame them? Not only are more retail sales shifting to e-commerce, but this online disruption is creating pricing pressure on brick-and-mortar retailers. This has led to a wave of retail bankruptcies, store closures, and many once-powerful retailers struggling to adapt and survive in the new retail landscape.
However, not all retailers are in the same boat. Here are two real estate investment trusts, or REITs, that could be excellent ways to invest in retail while avoiding e-commerce headwinds.
These malls are a cut above the rest
I generally tell people to stay away from mall REITs, but Simon Property Group (NYSE: SPG) is a different story altogether.
Not only is Simon the largest mall operator and one of the largest REITs of any kind, but the company's properties are in a category all their own. In fact, five of the 10 most valuable malls in the U.S. are in Simon's portfolio, and Simon's "Premium Outlets" brand has a dominant share of the outlet shopping market.
One of the biggest reasons to love Simon is that it's not just a retail REIT. The company is investing billions into its properties to create mixed-use destinations, including non-retail elements such as hotels, office spaces, apartments, entertainment venues, and more. The idea is that these things create a natural, e-commerce–resistant source of foot traffic for its retail tenants.
Here's perhaps the most important point to know: While many retailers with physical locations have seen sales plummet over the past several years, that is simply not the case at Simon's malls. As a whole, Simon's retailer sales per square foot are actually 4.5% more than they were a year ago. The company's strategy of creating world-class shopping destinations is paying off and gives Simon a huge competitive advantage when it comes to tenant retention. After all, if you're a struggling retailer, you aren't likely to close the stores where sales are still growing.
Retailers insulated from e-commerce and recessions
Realty Income (NYSE: O) is the largest REIT focused on freestanding retail properties, with about 5,900 properties located throughout the United States and the United Kingdom.
The business is set up to produce steady, predictable income over time. How does it do this with a portfolio of mostly retail properties? For one thing, most of its tenants fall into one or more of these three recession- or e-commerce–resistant categories:
- Discount-oriented -- Think of dollar stores and warehouse clubs. These businesses are thriving even in the face of e-commerce competition and tend to do just fine in recessions.
- Non-discretionary -- This category includes businesses like drug stores that sell things people need, and often can't be obtained quickly enough (or at all) through online channels.
- Service-based -- Examples include gyms and movie theaters. By definition, these businesses aren't vulnerable to e-commerce disruption.
Not only are Realty Income's tenants themselves very "safe" businesses, but the properties are net-leased. This means that tenants sign long-term commitments with annual rent increases built in, and that they cover the variable costs of property taxes, insurance, and maintenance.
The proof of this steady growth-focused business model is in the numbers. Realty Income has paid 592 consecutive monthly dividends and has generated a 16.8% annualized total return since its 1994 NYSE listing. To put this into perspective, a $10,000 investment in Realty Income's stock 25 years ago would be worth about $485,000 today. Who says steady growth has to be boring?
To be perfectly clear, I'm not saying that these two retail REITs are risk-free, especially in the short term. It's entirely possible that we could see the retail situation get worse before it gets better, and interest rate fluctuations could cause volatility in the share prices of these companies.
Instead, I'm saying that both Simon Property Group and Realty Income are well-positioned to deliver excellent long-term results for investors despite the current uncertainty in the retail environment. These are well-run companies with clear advantages and could be an excellent fit in a long-term investment portfolio.
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