Many investors are hesitant to get involved in the brick-and-mortar retail space, and quite frankly, who could blame them? It seems we can’t get through a week without having another high-profile retailer go bankrupt, shut down stores, or move more of its operations online.
However, some types of brick-and-mortar retailers are doing just fine. Discount-oriented stores, for example, are doing quite well as a whole, as are many non-discretionary retailers.
Even so, I don’t want to put my money into any one retailer. Instead, my favorite way to invest in retail is through a real estate investment trust, or REIT, that owns retail properties. Not only does this prevent my investment from being too dependent on any one retailer, but it also can produce an excellent income stream, as REITs tend to be wonderful dividend stocks.
With that in mind, here are two retail REITs that own the right kind of retail properties — Tanger Factory Outlet Centers (NYSE: SKT) and National Retail Properties (NYSE: NNN) — both of which pay excellent dividends and have produced some impressive results recently.
Outlet retail could have lots of growth ahead
Tanger Factory Outlet Centers is the only pure-play outlet shopping REIT in the United States, with 44 properties consisting of 15.3 million square feet of rentable space.
To be fair, Tanger has suffered somewhat in the recent retail downturn. Tenant sales are down by about 3% from their 2015 peak, and the company’s same-center net operating income is down by 1.7% year over year.
However, Tanger is still in solid shape. Its properties are 96% occupied, its balance sheet is strong, and its tenant base is well diversified. Funds from operations (FFO), the REIT version of earnings, grew by 2% over the past year. Most of Tanger’s tenants are very high quality and are in no danger of going bankrupt anytime soon, but even when tenants leave, outlets are far easier to reconfigure and turn over to new tenants than traditional retail spaces are.
Tanger has also started to get serious about making its shopping experiences more experiential, with things such as food-truck festivals ad family fun nights. These efforts have been successful so far.
Not only is outlet retail not suffering too much in the changing retail environment, but there also could be lots of room to grow. Outlet shopping is still a rather small industry, with only about 70 million square feet of total high-quality outlet space in the United States. To put that in perspective, mall REIT Simon Property Group (NYSE: SPG) has nearly three times that amount of space all by itself.
So, as one of the leading outlet shopping brand names, Tanger should have plenty of opportunity to expand into underserved markets over the coming years. In the meantime, Tanger pays a roughly 6% dividend yield and has increased its payout every single year since its 1993 IPO. And with the dividend representing less than 60% of 2018’s expected FFO, there’s no reason to believe the streak is in jeopardy.
Built for stability and consistent growth
National Retail Properties is a net-lease retail REIT. A net lease, also known as a triple net lease, is a specific type of lease structure that’s usually associated with freestanding (i.e., single-tenant) commercial properties. The lease terms are long, often 15 years or more, and there are typically annual rent increases built in. In addition, the tenants are responsible for the three major categories of variable property-ownership expenses — property taxes, building insurance, and maintenance.
In other words, a triple-net lease is designed to keep a tenant in place for a long time, ensure a predictably increasing rental income stream, and shift the variable expenses of ownership to the tenant.
Even so, a solid lease structure is only as good as the tenants that sign the leases. National Retail focuses on tenants that are resistant to e-commerce headwinds, as well as to recessions. For example, convenience stores are the largest property type in National Retail’s portfolio. These stores sell things that people need right away and no matter what the economy is doing.
Similar things can be said for automotive service businesses, health and fitness centers, and banks — just to name a few examples of the company’s top property types. These are businesses that Amazon.com and other e-commerce companies can’t duplicate and are needed in good times and bad.
Because of its excellent tenant base and lease structure, National Retail has a 98.5% occupancy rate and has grown its adjusted FFO by nearly 5% over the past year. It recently announced a 5.3% dividend boost — marking its 29th consecutive increase, a streak that only two other public REITs have matched.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel owns shares of Tanger Factory Outlet Centers. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.