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After a Brutal Period, Retail REITs See Better Days Ahead

Sep 06, 2020 by Matthew DiLallo
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The retail apocalypse went from bad to worse earlier this year as governments forced many retailers to close their stores to help slow the spread of the COVID-19 outbreak. Because of that, they couldn't make any money, which made it hard to pay rent. That affected the cash flowing to landlords like retail REITs, forcing many to reduce or suspend their dividends.

However, with most stores now open again, retailers are back to paying rent. That has given some retail-focused REITs the confidence to return more cash to their shareholders.

Bringing back the dividend

Kimco Realty (NYSE: KIM) is one of the largest owners of open-air, grocery-anchored shopping centers. The company gets about 43% of its annual base rent (ABR) from essential retailers like grocery stores, 43% from other retail services (many of which had to close during government-imposed lockdowns), and 14% from restaurants. It collected an average of 70% of the rent it billed during the second quarter as nonessential retail and restaurants struggled to pay. That led the REIT to suspend its dividend early in the quarter to preserve cash.

However, its rental collection rate has improved since then, hitting 82% in July and 85% in August. Further, it signed deferral agreements covering 18% of the unpaid rent during the second quarter and 5% of what it didn't collect in July, which it expects to receive by year's end. Because of that upward trend and the overall strength of its investment-grade balance sheet, Kimco reinstated a quarterly dividend for the third quarter.

At $0.10 per share, the reset dividend is below the prior level of $0.28 per share. However, the company made it clear that it's just the beginning as it expects to declare more dividends this year to meet the REIT requirement of paying out 90% of its taxable income. Further, Kimco CEO Conor Flynn commented on what's ahead by stating, "We expect to establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income in 2021." Thus, it appears the payout will head higher in the coming quarters.

Confidence restored

Federal Realty Investment Trust (NYSE: FRT) was one of the few retail REITs that didn't slash or suspend its dividend earlier this year. However, there was some concern it would go that route given its rental collection rate early on in the period, as it only collected 57% of what it billed in April and 54% of May's rent by the time it reported its first-quarter results.

All this led CFO Dan Guglielmone to caution on the first-quarter conference call that "the management team and our Board of Directors will be extremely disciplined in setting our dividend policy as we navigate moving forward."

However, the company put the fears of a dividend reduction to rest in August when it declared an increase over the prior level. That marked the 53rd consecutive year the REIT raised its dividend, a record in the sector.

Several factors gave it the confidence to make that move, including "continued positive trends in our collections, our fortress balance sheet built for times like these and, most importantly, the continued desirability of our locations, as evidenced by current tenant discussions." Aside from a notable increase in its rental collection rate (76% in July vs. 68% during the second quarter), Federal Realty signed 50 new and renewal leases at a rental rate of $28.55 per square foot, which was an increase from the average of $25.64 per square foot on the prior leases. That shows retailers still demand physical space.

These positive trends bode well for retail REIT dividends

After a challenging first half, retail REITs see signs of life as more of their tenants are making their rent payments and agreeing to make up those they missed. That's giving financially stronger retail REITs the confidence to start returning more cash to investors. These trends could prod their peers to make similar moves, making the sector look a bit more enticing to income-seeking investors.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.