It’s no secret that retail is in a tailspin. The rise of online shopping has cratered sales at long-time retail stalwarts like Macy’s Inc (NYSE:M) and Kohl’s Corporation (NYSE:KSS). And while share prices of the retailers themselves have suffered, the owners of the physical brick-and-mortar stores have suffered more.
Retail real estate investment trusts (REITs) have plunged on the recent spate of bad earnings for their major tenants. The sector is down nearly 6% in just one week. And over the course of the past year or so, they’ve suffered much, much worse.
That’s just the kind of opportunity that income seekers should be looking for.
Yes, some retailers are dying … but other retailers are thriving in the new e-commerce world, whether it’s because they’re increasingly participating online, or because e-commerce isn’t really affecting their area of the retail world. Class A mall sales per square foot have continued to rise, while many mall owners have begun to focus more on entertainment and less on shopping. That’s helping to drive sales. Moreover, REITs that own standing real estate continue to see great demand for their properties.
But Wall Street doesn’t know how to pick and choose losers, so a lot of quality retail REITs have been thrown out with the bathwater. That means quality companies have not only gone on sale … but lower prices have resulted in even higher dividends in this part of the real estate space.
With that in mind, here are three retail REITs to scoop up from the wreckage.
Retail REITs to Buy: National Retail Properties (NNN)
Dividend Yield: 4.8%
What do convenience stores, restaurants and auto service stores have in common? They’re pretty much internet-proof.
And they all happen to be primary tenants of National Retail Properties (NYSE:NNN).
National Retail Properties’ portfolio includes more than 2,500 locations across the company, with single-tenant retail comprising the vast bulk of those properties. Whether it’s Sunoco LP (NYSE:SUN) gas stations, LA Fitness gyms or just your neighborhood 7-Eleven, NNN’s portfolio diversity is vast.
There’s also no sign of retail dying here. This REIT’s locations have an insane occupancy rate of 99%. That comes from NNN’s focus on quality tenants in prime areas.
What’s even better is that National Retail Properties operates in the holy-grail of REITs — triple-net leased properties. This pushes the responsibility of taxes, maintenance and other fees associated with renting the property onto the tenants. NNN sits back and collects a bigger check as a result.
This produces a steady stream of cash that funds a solid, growing dividend. National Retail Properties has improved its payout every year for the past 27 years, and that won’t stop anytime soon. Meanwhile, roughly 30% losses since last summer have put NNN on discount and boosted the yield to nearly 5%.
Retail REITs to Buy: Tanger Factory Outlet Centers (SKT)
Dividend Yield: 5.3%
If there is one area of the retail sector that is still thriving, it’s discounting. Consumers want their goods, and they want them cheap — and not all of them want to go online to get that.
That’s the sweet spot for Tanger Factory Outlet Centers (NYSE:SKT).
SKT is the biggest REIT focused on outlet shopping, and it has built a wide moat with producers, creating one heckuva brand name in the space. Today, Tanger owns a portfolio of 44 outlet shopping centers located in 22 states.
The beauty is that many of these outdoor shopping plazas are located in higher-income areas that are unaffected by recessions and other downturns. Meanwhile, SKT’s properties feature plenty of amenities, such as restaurants and movie theaters, to keep luring shoppers back for the bargains.
Earnings did dip a bit last quarter, but that was mostly due to expansion costs. In the end, that spending will translate into higher cash flows down the road — especially considering that Tanger’s portfolio is 98% occupied and the firm managed to grow its rents by 8.9% in the first quarter. Likewise, funds from operations (FFO) metrics are still very strong.
Shares are off roughly 40% since summer, so they’re priced to buy.
Retail REITs to Buy: Pennsylvania REIT (PEI)
Dividend Yield: 7.6%
Pennsylvania REIT (NYSE:PEI) could be a prime example of how the future of mall REITs will look.
This owner of regional malls has been hit hard during the latest decline, but much of that drop may be unjustified. Unlike some mall operators, Pennsylvania REIT has realized that the regional mall’s days could be over, and has begun adjusting itself accordingly.
PEI has dumped “junk” malls and taken a “consumer-driven approach” to creating its tenant mix. That means replacing dying anchor stores with restaurants, entertainment complexes and high-end salons. A prime example of this shift was the addition of a Legoland Discovery Center to the Plymouth Meeting Mall.
The idea is that malls have to become a destination for a full day’s worth of entertainment rather than somewhere to just pick up a shirt.
The changes are working. PEI’s sales per square foot increased to $465 in the most recent quarter, up about 2% year-over-year, while leasing spreads for non-anchor space reached 92.1%. That’s a vast improvement from the past few years, and shows that Pennsylvania REIT has its head in the right place.
PEI is a turnaround play for sure — the stock is off roughly 55% in the past nine months alone. But the turnaround appears to be legit, and a nearly 8% yield will provide a thick padding of protection while you wait for the transition to fully take hold. FFO grew 16% during the most recent quarter, so the dividend looks pretty safe, too.
Pennsylvania REIT is showing that retail won’t die if it evolves. Investors should buy this evolution.
As of this writing, Aaron Levitt was long PRE and SKT, and was considering adding NNN on dips.