REITs to Buy for the Eventual Retail Rebound

While most retail stocks don’t look great right now, there is a way to get in on the ground floor of a recovery.

shopping mall

Shopping is a national sport. For proof, look no further than the lines of people camping out at their favorite retailers before Black Friday. Or visit the gift shops of any beach town in the middle of summer. But that was before. Now?

Who needs the big name brick-and-mortar retailers? Well, I have to tell you, with the exception of Lowe’s, Home Depot, and the grocery stores, not me!

It’s amazing how much time (and money) I save by not going shopping. That’s one thing for which I can thank the coronavirus pandemic. But, unfortunately, the pandemic has been devastating for a group of businesses that have long been struggling. It will be the death knell for many of them. But not all…which is why shopping center REITs could be good long-term, bounce-back investments. More on my favorites in a bit.

The short-term state of retail is ugly, but there are investment opportunities if you know where to look.

According to GlobalData Retail, 60% of overall U.S. retail square footage has closed its doors since the pandemic. Total online and store purchases fell 8.7% in March. Best Buy announced it is furloughing 125,000 employees. The Gap has laid off tens of thousands and has burned through $1 billion in cash since February. Nordstrom’s sent more than 300,000 employees home.

The beneficiaries have been Amazon (AMZN), as well as retailers that had already been building their online presence. E-commerce sales had already doubled over the same period last year by February. And since the pandemic started, they were up another 38% in March.

Some retailers have gotten into the online game, creatively. Nike and Lululemon have upped their online activity by offering exercise classes. Several retailers have been allowing customers to order online and pick up curbside.

But those who had not established a robust online presence before the coronavirus—retailers like the Gap, Kohl’s, and Macy’s—are hurting. Prices are being discounted as much as 70% at some stores. And we’re suddenly seeing bankruptcy filings from J. Crew and luxury department store retailer Neiman Marcus Group, who both filed for Chapter 11 bankruptcy protection. Forever 21 filed in September 2019 and closed 100 stores. It’s amazing that J.C. Penney is still in business, after years of struggles, and rumors have it that the company is hoping to skip liquidation, perhaps by filing for bankruptcy. Same with Sears and Kmart; I just can’t see them holding on. Pier 1 filed for bankruptcy in February.

It’s going to get worse. S&P Global Ratings says that some 30% of retailers have at least a 1-in-2 chance of defaulting on their debts and more than 2,100 retailers in the U.S. have permanently closed this year, and another 9,700 store locations are shuttered. Experts say that 20%-25% of all U.S. stores could close in the next two to three years.

As for what to buy now, here are the companies that I think are going to be the losers: big department stores like Macy’s (M), boutique retail establishments like The Gap (GPS), and shopping center REITs that are anchored by big department stores. If you have those in your portfolio, it’s probably best to take your losses now.

The winners at this point have been Walmart (WMT), Costco (COST), Kroger (KR), Lowe’s (LOW), Home Depot (HD), and, of course, Amazon. Lowe’s shares have almost doubled; the others are all up. But before coronavirus, Walmart and Kroger had had their ups and downs. Costco has been a perennial investor favorite. And both Lowe’s and Home Depot have benefited by being two of the few stores you could actually visit since coronavirus concerns shuttered many storefronts. The boost may be temporary for most of them—with the exception of Amazon. Amazon has found new audiences with its streaming and Amazon Web Services, in addition to its e-commerce gains.

But not everyone wants to buy a stock priced at more than 2,400 a share.

Take the long view on retail by investing in shopping center REITs
Instead, thinking longer-term, why not consider some of the real estate investment trusts (REITs) that own shopping centers anchored by stores that are not the big department retailers?

Here are a few ideas:

National Retail Properties, Inc. (NNN) owns 3,125 properties over 48 states covering 37 lines of trade. Its top tenants include: 7-Eleven, Mister Car Wash, Camping World, LA Fitness, Flynn Restaurant Group (Taco Bell/Arby’s), GPM Investments (Convenience Stores), AMC Theatres, Couche-Tard (Pantry), BJ’s Wholesale Club, Sunoco, Chuck E. Cheese’s, and Mavis Tire Express Services.

Slate Retail REIT (SRRTF) is a Canadian-based REIT that owns 76 properties totaling approximately 9.9 million square feet. Tenants include Kroger, Publix, Ross Stores, PetSmart, and Rack Room Shoes.

Realty Income Corporation (O) owns 6,500 properties. Its top 10 tenants include: Walgreens, 7-Eleven, Dollar General, FedEx, Dollar Tree / Family Dollar, LA Fitness, AMC Theaters, Regal Cinemas (Cineworld), Walmart / Sam’s Club, and Sainsbury’s.

It may be a bit before these shares start to recover, but they are long-term ideas. And they all pay decent dividends while you wait for appreciation. So, why not go shopping?

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