3 value REITs to buy for an economic recovery

As the economy begins to reopen, investors should consider specific REIT subsectors for big profits.

  • By Coryanne Hicks and Mark Reeth,
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As vaccines roll out, new COVID-19 treatments appear and more of the economy reopens, investors are trying to determine how they should invest in a post-pandemic world.

With tech stocks dropping and the market's momentum cycling toward value investments, eyes are turning to beaten-down sectors that promise big profits in an economic recovery. Movie theaters, airlines and brick-and-mortar retailers are just a few of the industries investors are watching, but they shouldn't forget about real estate.

Real estate investment trusts, or REITs — companies that must distribute at least 90% of taxable income to shareholders each year via dividends — took a beating in 2020. While the S&P 500 (.SPX) climbed roughly 16% last year, the real estate sector finished down 4.6%. The sector has since turned around in a big way, becoming one of the top performing sectors of 2021.

Luckily for investors, that means there is plenty of value to be found in REIT stocks that still have the potential to excel as the economy continues to recover. Here are the three REITs investors should watch this year:

  • Simon Property Group (SPG)
  • STORE Capital (STOR)
  • Digital Realty Trust (DLR)

Simon Property Group

Brick-and-mortar retailers took a heavy hit last year as consumers stayed at home, instead shopping and ordering online in record numbers.

Even as retailers struggled, some of the worst pain was felt by the malls and shopping centers subsector — while their tenants may have been able to transition to online retail, shopping center landlords were left holding the bag. The result was an extremely difficult year for shopping center REITs like Simon Property Group (SPG), the largest owner of shopping malls in the U.S.

"This is my favorite value play within the REIT space today," says Daniel Milan, managing partner of Cornerstone Financial Services. SPG's stock price dropped 60% during the initial COVID-19 shutdowns, and "while it has recovered nicely, it has not recovered to the five-year highs yet."

Simon Property Group "manages one of the top retail portfolios in the country," according to Morningstar Equity Analyst Kevin Brown. Its holdings include regional malls and premium shopping centers in affluent and densely populated areas that offer a high-quality shopping experience that he thinks retailers will continue to pursue.

Brown also notes that SPG's occupancy rates, which fell nearly 90% in 2020, are only beginning to recover and rent remains low. Morningstar's analyst team is bullish on the ability of these high-quality malls to return to pre-pandemic levels. But given SPG's long road to recovery, don't expect a quick turnaround.

SPG also has a strong 12-month forward dividend yield of 4.5% and a "great history of dividend growth fitting into the inflation hedge theme," Milan says.

STORE Capital Corp.

The U.S. housing market has gotten incredibly hot this year as supply dwindles and home prices soar.

One problem is that many millennials who moved to major metropolitan areas for work and leisure now find themselves unable to enjoy either, and they have begun to look to the suburbs for better quality of living.

STOR (STOR) specializes in single-tenant properties across the U.S. "With COVID-19, many of their tenants were negatively affected and their stock price declined over 60%, as a result with the uncertainty of retail going forward," Milan says.

At the time, he thought this drop was overblown as some of STORE's tenants were classified as "essential," so it could have been worse, but the stock price decline didn't reflect that fact.

"While the stock price has rebounded nicely, it is still below their five-year high and has a nice 4.81% dividend yield," Milan says. "They also have a strong history of dividend growth, which I find to be extremely important in today's market to fight inflation risk."

Digital Realty Trust

The pandemic has triggered a domino effect of changes, and perhaps the greatest change of all has been the shift to a work-from-home model of business.

Last year, many companies had no choice but to let their employees work out of their homes, spurring huge demand for data as people hopped on the internet not only to clock in at the office but to stream movies and download video games in record numbers.

This has been a boon for Digital Realty Trust (DLR), one of the largest data center real estate companies in the country. As people continue to work from home and companies invest more in cloud computing, Digital Realty is well-positioned to profit.

DLR provides data center, colocation and interconnection services to businesses, with nearly 300 facilities in 23 countries. It is also an environmental leader in the sector, according to MSCI ESG Ratings, but it does face regulatory and reputational risks if major data breaches occur because most of its facilities are in highly regulated countries.

What DLR does have to offer is a solid 3.2% dividend yield that has overshot consensus estimates in the past two quarters.

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