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Retail real estate has been hit very hard by the economic shutdowns to slow the early spread of COVID-19. That, however, is opening opportunities for investors looking for real estate investment trusts (REITs) to own. And, if you act now, the yields you can find are very attractive. Here are three top REITs to consider today, all of which have yields well above 3%.
The conservative choice
Realty Income (NYSE: O) is a net lease REIT focused on retail assets (85% of rents; the rest comes from industrial, office, and "other" assets). The company has an incredible streak of more than 25 annual dividend increases under its belt, making it a Dividend Aristocrat. In fact, it is one of only three REITs in the S&P 500 Dividend Aristocrat Index. And, even during the current difficult environment, its AFFO payout ratio was a solid 82% through the first nine months of 2020. Occupancy, meanwhile, is currently 98.6%, and it collected roughly 93% of its rent in October. In other words, it's doing OK today despite the headwinds.
The problem is that Realty Income's strengths are a well-known property on Wall Street, which means the stock pretty much always trades at a premium. But, for conservative long-term investors, paying up for a great company is probably worth it. Only, given the difficult market background right now, Realty Income is actually cheaper than it has been in many years. Using dividend yield as a rough guide for valuation, the REIT's 4.67% yield is toward the high end of its 10-year yield range. Investors aren't getting a great bargain here, but Realty Income is a great REIT that appears to be trading at a fair, perhaps even a little attractive, price.
Next up is VEREIT (NYSE: VER), a competitor to Realty Income in the net lease space. This means they both own single-tenant properties for which their lessees pay most of the property-level operating costs. It's a fairly low-risk niche in the REIT space -- only, VEREIT has a bit of a sordid history, including an accounting scandal that led to a complete business overhaul. That, however, was a long time ago, and new management has finally moved beyond the remaining issues, most notably on the legal side of the equation. But now it's dealing with COVID-19.
What differentiates VEREIT from Realty Income is diversification. VEREIT generates 45% of its rents from the retail sector, 21% from restaurants, 18% from offices, and 17% from industrial assets. That gives its portfolio more balance, which has shown up in its rent collection rates, currently sitting at around 95% with occupancy in the high 99% range.
The problem here is that, as the pandemic got underway, VEREIT chose to cut its dividend by roughly 45%. This was out of an abundance of caution, not because the REIT's business was falling apart. (The cut reduced the AFFO payout ratio in the second quarter to an incredibly conservative 51%.)
But that cut actually sets VEREIT up for stronger growth going forward because it effectively reduces the company's cost of capital. The yield is around 4.7% today, but once this REIT starts to shift back into growth mode, investors are likely to quickly forgive past sins.
Know what you own
Federal Realty (NYSE: FRT) is probably the hardest name here to like right now. This REIT owns roughly 100 shopping centers and mixed-use developments (it is also not a net lease REIT). At one point during the early stages of the pandemic, it was collecting only around 65% its rents. That figure in the third quarter has only improved to 83%, which is still pretty bad and well below the figures Realty Income and VEREIT have been able to achieve. So what's to like? History, location, and valuation.
For starters, Federal Realty has increased its dividend annually for 53 consecutive years, including one in 2020. That puts it among an elite list of just 30 companies considered Dividend Kings. It clearly believes supporting the dividend is important.
Second, the company's portfolio of properties is highly curated, with locations in high-barrier-to-entry markets with wealthy populations. These are the types of retail assets people want to shop in and retailers want to occupy. In fact, it signed 50 new leases in the second quarter despite COVID-19 headwinds.
Lastly, the REIT's 5.9% yield is at its highest level since the 2007 to 2009 recession. So it looks like investors have put Federal Realty on the discount bin. It might take a little while for the REIT's business to get back on track, but with investors seemingly pricing in the worst for this well-tested dividend payer, it looks like there's an opportunity for long-term investors to jump aboard.
Something for everyone
It would be hard to suggest retail-focused REITs are easy to own right now, given the pandemic. However, you can't paint all landlords with the same brush.
Realty Income is a slow and steady dividend payer, handling the COVID-19 headwinds in stride. VEREIT got its business back on track just as COVID-19 hit but appears positioned to start growing again. That should change Wall Street's perception of the REIT. And Federal Realty is muddling through, but based on its history (notably on the dividend side of things) there's a very good reason to believe it will make it to the other side of the pandemic without too much difficulty. For more aggressive long-term investors, Federal Realty is worth looking at, while other investors are being extra cautious.
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