Shopping for Value Among Retail REITs

It's been a tough year for operations at malls, retailing and commercial property owners. But with hopes for improving economics over the coming year, many investment experts are looking to real estate investment trusts as a favored play for growth and income. Here are some favorites from MoneyShow.com contributors. Kelley Wright, Investment Quality Trends Simon Property Group is giant mall operator and REIT, which was one of the worse possible businesses to be in during a global pandemic. It owns, develops, manages, leases, and acquires primarily regional malls and community shopping centers. It is one of the largest owners of shopping centers in the world. SPG either owns or has an interest in 235 properties comprising 191 million square feet consisting of 99 malls, 69 outlets, 14 mills, four lifestyle centers and four other properties spread over 37 states and Puerto Rico as of the end of Q2 2020. Internationally it has ownership interest in outlets in Asia, Mexico, Europe, and Canada totaling 31 properties. SPG also has a 22.4% equity stake in Klepierre SA, a publicly traded, Paris-based company that has interest in shopping centers in 15 countries in Europe. In February 2020, SPG announced that it had entered into a definitive agreement to acquire 80% ownership interest in Taubman . In November 2020, SPG announced it had reached an agreement with TCO to modify the original merger agreement, which will lower the acquisition cost by approximately $800 million. SPG has the best balance sheet compared to peers at 8.6 times debt-to-recurring EBITDA compared to the peer average of 21.2 times as of the end of Q2 2020. SPG paid Q2 dividends of $1.30 per share, in cash, a 38% cut from the previous quarterly dividend of $2.10. SPG expects to pay at least $6.00 per share in cash dividends for 2020, subject to the board approval. The current quarterly dividend rate of $1.30 per share should be sustainable as it represents a 70% FFO payout ratio. Yes, the dividend was reduced, which was necessary for the long-term benefit of the company and its shareholders. With vaccines being delivered and the hope of herd immunity developing, this could be a huge positive going forward. Tom Hutchinson, Cabot Dividend Investor Realty Income is one of the highest quality and best-run real estate investment trusts. It has operated for over 51 years and currently has 6,500 properties rented to 600 different tenants in 49 states, Puerto Rico and the United Kingdom. An investor would be hard pressed to find a more reliable dividend payer. Realty has paid 604 consecutive dividends throughout its 51-year operating history dating back to 1969. And the monthly payout has been raised 92 times during that period. This is a rare monthly dividend payer with some serious stamina and staying power. How do they do it? The company buys established properties with a proven record of profitability and rents them to high-quality tenants. The business model is to generally use a sale-leaseback arrangement whereby Realty Income purchases the property from the tenant and then the company remains there and pays rent under long term leases of 10 to 20 years. The pandemic has not been kind to the REIT sector. Realty Income was recently still down 25% from the high in February. But the operational performance is way more solid than that selloff indicates. In the first nine months of this year, revenues were actually 20% higher and earnings per share are actually up 3.7% over the same period last year. Realty Income currently yields 4.6%. After a year that has dragged much of the REIT sector down, ahead of what is likely to be a powerful recovery, this REIT offers a fantastic buying opportunity for a stock that is rarely cheap. John Buckingham, The Prudent Speculator Real estate investment trust Regency Centers is a national owner, operator and developer of neighborhood and community shopping centers. The company has been in the business more than 50 years and has a portfolio that is primarily anchored by productive grocers located in affluent and attractive more-populated metro areas. Shares have struggled this year, as the pandemic hit retailers especially hard. REG reported receiving 86% of Q3 rent and has seen an uptick in new leases, while grocers, drugstores, banks and home improvement tenants have been the strongest performers in areas where retailers were allowed to reopen. Management observed that there is a direct relationship between fully reopening shopping and rent collections, which while not surprising on its own, is indicative of the need for vaccines to be deployed quickly and widely (beyond the obvious health benefits). We believe that bricks-and-mortar retail will continue to be important after the pandemic passes, while those that have converted to more online shopping will see their packages shipped from local stores instead of massive distribution centers. The dividend yield is 5.2%. Rida Morwa, High Dividend Opportunities With 31 years of dividend raises, National Retail Properties has achieved Dividend Aristocrat status -- the triple-net REIT has survived and thrived through several recessions without even pausing their dividend. Today, the business is stabilizing, and the outlook for growth in 2021 is bright. Investors can get a 5.1% yield today and enjoy great capital gain potential as well as annual dividend growth. Triple-net refers to a type of lease where the majority of the expenses are the responsibility of the tenant. The tenant pays for property taxes, building insurance and maintenance of the property. For the landlord, this means an investment that produces regular rent with minimal capex needs and inflation risk is on the tenant. For tenants, they benefit because triple-net leases have lower rent and they have more freedom with what they do with the property. Meanwhile, one common form of acquisition for NNN is the sale-leaseback. This means that the tenant sells the building to NNN and then leases it back. The tenant frees up a lump sum of capital that was tied up in the building in exchange for an obligation to pay rent. They can then use that capital to expand their own operations. Historically, 71% of NNNs investments have been based on existing relationships. This model has been very successful for NNN, allowing them to leverage their relationships and have a steady flow of new deals with tenants that have been reliable. The reason why NNN is trading so cheap right now is not a secret. The impact of Covid-19 is reverberating throughout the economy. NNN has over 300 different tenants and it's inevitable that some of them are going through bankruptcy. In Q3, the REIT reported that 90% of rent was collected, 5% was deferred and the remainder was unresolved/in negotiation. With Covid-19 vaccines in sight, we can expect that some of NNN's strongest tenants are going to be looking at the opportunity to grow their market share, buying out competitors and building new locations. This will be a growth opportunity for NNN. For shareholders, NNN has consistently rewarded them with dividend raises. We can enjoy a 5.1% yield today, with confidence that our income stream will grow annually. At the current price, buy NNN and never let go. It is set to be the biggest winner in your high-yield portfolio. Bob Ciura, Sure Dividend W.P. Carey is a commercial real estate focused REIT that own real estate properties and lease them to various tenants to generate cash flow. It has a highly diversified real estate property portfolio across multiple industry groups. The REIT operates more than 1,200 single tenant properties on a net lease basis, across the US and Northern and Western Europe. W.P. Carey reported its third-quarter earnings results on Octo. 30. Revenues totaled $300 million, down 2% year over year. Funds from operations, or FFO, increased 3% on a per-share basis to $1.15 for the quarter. W.P. Carey benefited from 99% rent collection in October, fueling hopes that the worst is behind it. The REIT also reinstated its guidance for 2020, now forecasting FFO per share in a range of $4.65 to $4.75. Importantly, this should be sufficient to fully cover the annualized dividend payout of $4.18 per share. W.P. Carey generated FFO-per-share growth at a rate of 6% annually between 2009 and 2019, which was a very solid growth rate for a REIT. The growth rate has slowed down over the years, as W. P. Carey's FFO-per-share growth rate has averaged just 3% between 2014 and 2018. Still, this is a decent growth rate, and we expect a similar growth rate of 3%-4% annually going forward. Growth is fueled by investments in new properties. Since 2012, the REIT invested more than $10 billion into new assets by either purchasing entire REITs or through single-asset/portfolio purchases. Plus, due to the defensive nature of its business and a strong performance during past recessions, we believe that W.P. Carey will navigate the coronavirus crisis. W.P. Carey has an investment-grade credit rating of BBB from Standard & Poor's. It has a fairly low level of maturities ($768 million) through 2022. It also has a long history of stable dividend growth, having increased its dividend every year since 1998.

Shopping for Value Among Retail REITs

These names are a favored play for growth and income in an improving economic environment.

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