With the market up near all-time highs, it’s getting hard to find cheap stocks, but you can do it if you look in the right places. Right now, that includes retail landlords like Simon Property Group (NYSE: SPG) and Federal Realty Investment Trust (NYSE: FRT), as well as net lease player W.P. Carey (NYSE: WPC). The first two will probably take a strong stomach to own, but the third is a real estate investment trust (REIT) even the most conservative investor could easily love. Here’s a quick rundown on each.
A giant in the hard-hit mall sector
Simon Property Group owns around 200 enclosed malls and outlet centers. The coronavirus has not been kind to its business, with the REIT collecting just 85% of the rent owed in the third quarter. Funds from operations (FFO), which is like earnings for an industrial company, was off by 33% year over year in the quarter. Worse, the company cut its dividend roughly 40% in the second quarter. That’s a lot of bad news and, frankly, there’s no quick fix.
However, the stock is down around 40% so far in 2020 and, even after the dividend cut, is yielding a generous 6%. The average REIT, using Vanguard Real Estate Index ETF (NYSE: VNQ) as a proxy, yields just 4.1%.
Meanwhile, Simon is one of the strongest mall landlords. Its portfolio is well-positioned in markets with dense, wealthy populations, and it has industry-leading balance sheet strength. It’s highly likely to survive this headwind and, noting that it’s investing in bankrupt retailers and recently reworked a deal to buy a competitor, looks like it will come out the other side a stronger competitor. If you can handle some uncertainty, this mall owner looks cheap and relatively attractive.
The strip mall leader
It’s not just enclosed malls having a hard time collecting rent. The issue is also one strip malls like the ones that Federal Realty owns are dealing with. This REIT also collected just 85% of its rents in the third quarter, and its stock is down about 30% so far in 2020. FFO was lower by around 20% year over year in the quarter. The 4.7% dividend yield is near its highest levels since the 2007 to 2009 recession.
But Federal Realty didn’t cut its dividend. In fact, it raised it by a token penny a share in the third quarter as a show of strength. Basically, management believes strongly that it will get through this industry downturn like it has so many before — the REIT has increased its dividend annually for more than five decades!
The key, just like with Simon, is that it owns around 100 shopping centers and mixed-use developments in highly desirable locations (think densely populated and wealthy). Add a solid balance sheet to the mix, and there’s a good reason to believe it will end up better-positioned on the other side of COVID-19. In fact, management noted during Federal Realty’s third-quarter 2020 earnings conference call that it’s fielding inquiries from potential tenants looking to move into its properties from nearby locations owned by other landlords.
Location is vital in real estate, and this REIT clearly has top-notch properties retailers want to get into. You might want to get in, too.
Unloved for no good reason
The last name here is W.P. Carey, one of the oldest, largest net lease REITs. It easily stands toe-to-toe with industry bellwethers like Realty Income (NYSE: O). To put some numbers on that, its rent collection through this rough patch never fell below 96% while some of its peers were struggling to collect around half of their rent roll. In October, W.P. Carey basically collected all of the rent it was due. Meanwhile, the REIT increased its dividend in each of the first three quarters of the year, extending its over 20-year annual streak again as it marches toward Dividend Aristocrat status.
W.P. Carey’s yield, meanwhile, is a generous 6%, which is well above the REIT average and Realty Income’s roughly 4.6%. In addition to that yield advantage, W.P. Carey also happens to be among the most diversified REITs you can buy. That’s a key part of its strength, with a portfolio that spans the industrial (24% of rents), warehouse (23%), office (23%), retail (17%), and self-storage (5%) sectors, with a fairly large “other” group making up the difference. It also generates around 37% of its rents from outside the United States, mostly from Europe.
Some investors may be worried that Europe is facing renewed COVID-19 headwinds, but if history is any guide, that’s unlikely to materially impact W.P. Carey. When you add up the positives here, a relatively high yield, diversification, and solid portfolio performance, this net lease REIT looks like it’s being left behind for no good reason.
Time for some deep dives
There’s no such thing as a perfect stock investment, since every company comes with some warts. That said, the negatives for this trio appear to be outweighed by the positives. If you can handle some uncertainty, retail-focused landlords Simon Property Group and Federal Realty are both worth closer scrutiny. W.P. Carey, meanwhile, is a net lease name that probably deserves to be on the short list of even the most conservative investors.