Broadly speaking, retail real estate investment trusts (REITs) have been among the most vulnerable real estate assets this year, owing to mall and store closures forced by the coronavirus pandemic and the advancement of e-commerce.
However, some analysts see retail REITs as poised to rebound in 2021 as the economy normalizes, a trend that investors can play via the ALPS REIT Dividend Dogs ETF (NYSEArca: RDOG). A primary advantage of RDOG as an avenue to retail REITs is that the fund is diversified, offering exposure to other REIT industry groups.
Adding to the case for RDOG is that it has avenues for mitigating dividend duress. RDOG also excludes mortgage REITs to mitigate the fund’s interest rate and credit risk and it also has a mechanism for ensuring steady dividends as it mandates constituent REITs have Trailing Twelve Month (TTM) Funds From Operations per share (FFOPS) greater than TTM Dividend Payouts per share (DPS).
“As e-commerce growth outpaces in-store sales, the overall demand for retail space will shrink and many existing stores and malls will close their doors,” writes Morningstar analyst Dave Sekera. “Yet, we expect the reduction in retail space will occur almost entirely among lower-quality (Class C and Class D) locations. As the vaccine is rolled out and consumers are once again comfortable returning to public venues, we expect that Class A malls will quickly rebound.”
The Real Estate Rebound
Another point in favor of RDOG is low interest rates and modest inflation – two scenarios with little of sign of changing anytime soon.
Additionally, RDOG can mitigate any stuttering in the retail REIT comeback story because it has exposure to the real estate side of e-commerce. RDOG also has an almost 12% weight to industrial REITs, a group benefiting in significant fashion from the e-commerce boom, a shift amplified by the coronavirus pandemic.
“Over the longer term, we expect the historical correlation between e-commerce sales growth and in-store sales growth to normalize,” according to Morningstar.
RDOG, which yields 6%, is higher by 21.38% over the past month.
Other REIT ETFs include the Schwab US REIT ETF (NYSEArca: SCHH) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.