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Which Grocery Store REITs Need to Be on Your Radar Right Now?

Apr 09, 2020 by Matthew DiLallo

Several state and local governments have issued stay-at-home orders and closed non-essential businesses to combat the spread of the COVID-19 outbreak. That's having a devastating impact on retailers that rely on foot traffic to drive sales. Because of that, many are struggling to pay their bills, including rent. This potential loss of rental income is affecting commercial real estate investors who own retail properties, including many real estate investment trusts (REITs).

Grocery stores and other essential businesses, however, remain open during these uncertain times. Because of that, REITs focused on owning neighborhood shopping centers anchored by grocery stores should weather this storm better than others. Here's a look at a few worth watching.

An intriguing retail opportunity

Retail Opportunity Investments Corp. (NASDAQ: ROIC) is a REIT specializing in the acquisition and management of grocery-anchored shopping centers along the West Coast. It owned 88 shopping centers leased to 1,944 tenants, with supermarkets anchoring 96% of its locations.

Overall, 82% of its total monthly base rent comes from daily necessity, service, and destination retailers like grocery and drug stores, restaurants, banks, and other vital services. Because of that, many of its tenants are essential businesses that will remain open during the COVID-19 outbreak. Further, they're less susceptible to the disruption of e-commerce when conditions improve.

However, only about a quarter of its rent comes directly from grocery stores. As such, the company will still feel some effect from the pandemic, which recently led it to withdraw its 2020 FFO guidance. It plans to issue a new forecast when it reports its first-quarter results on April 22. Because of that, investors might want to wait until they can review that report before buying shares of Retail Opportunity Investments Corp.

Insulated against COVID-19 and e-commerce

Weingarten Realty Investors (NYSE: WRI) acquires and develops strategically located neighborhood and community shopping centers. The company owned 170 properties across 16 states, mainly in the Western and Southern parts of the country. Supermarkets anchor about 80% of its locations.

About 80% of Weingarten's rent comes from businesses that have a low vulnerability to e-commerce disruption, which bodes well for its post-pandemic future. However, only 14% of its base rent currently comes from supermarkets, which implies some potential near-term effect if other major tenants like restaurants, services, and discount apparel sellers can't return to business as usual soon. Because of that, it, too, withdrew its initial guidance.

Weingarten plans to update investors on its outlook when it releases its first-quarter results on May 8, which investors might want to review before buying shares.

Well-positioned against current and future disruptions

Regency Centers Corporation (NASDAQ: REG) is another grocery-centric REIT. It owns 419 open-air shopping centers around the country, with 80% anchored by grocery stores.

Overall, 42% of its base rent comes from essential retail tenants, including 22% from grocery and drug stores. Meanwhile, another 18% comes from restaurants, with the majority of those being quick-service ones that offer takeout and drive-through options. The makeup of its portfolio puts it in a solid position to weather the disruption from COVID-19, though it's not entirely immune, which is why the REIT also withdrew its guidance.

The company expects to provide investors with an update on how much the pandemic will impact its operations when it reports its first-quarter results on May 7.

On a more positive note, it's in an excellent spot to thrive once conditions normalize. Its essential tenants will continue to drive traffic to its shopping centers, which will benefit others in these locations, most of which are relatively immune from online competition.

On sale but a bit too much uncertainty to buy

Shares of these grocery store-focused REITs have all declined by at least 40% this year due to the impact of the COVID-19 pandemic. While those lower prices seem intriguing -- especially since these REITs are in a better position than many of their retail-focused peers to endure this downturn as well as the future threats from e-commerce -- there's still too much uncertainty right now. That's why investors should consider putting these REITs on their watchlists and wait until they provide more details on COVID-19's impact on their tenants before buying.

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Matthew DiLallo owns shares of Retail Opportunity Investments. The Motley Fool owns shares of and recommends Retail Opportunity Investments. The Motley Fool has a disclosure policy.

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