Pandemic-hit 2020 was not a great one for Acadia Realty Trust (NYSE: AKR), which ended up suspending its dividend for a time. With vaccines helping to get the economy back into gear, however, the dividend is back, and investors might be interested in this unique retail-focused real estate investment trust (REIT). Here are some things to consider before you jump aboard.
The core portfolio
The base of Acadia's portfolio is a core collection of owned retail assets. That sounds simple enough, but it needs a bit more of an explanation. Around 40% of this REIT's rents come from shopping centers, often anchored by grocery stores or other large retailers. This is a pretty well-understood asset class, and there are a lot of different competitors that operate in the space. However, the remaining 60% of Acadia's portfolio is a bit different.
About 40% of its rent comes from "street level" shopping in major metropolitan areas like New York, Chicago, Boston, and San Francisco, among others. Basically, it buys properties in key shopping corridors in big cities. The last 20% of rent comes from "urban" retail assets. This category is something of a mix of the other two, basically boiling down to shopping centers located in city environments (that's a simplification but directionally correct).
There's nothing inherently wrong with what Acadia owns, but it isn't your typical retail landlord. Some might find that appealing, since it would be hard to replace a property located on iconic Melrose Place in Los Angeles. But there are very different dynamics involved in owning such properties compared to a strip mall in a wealthy suburb. Indeed, Acadia doesn't have any control over what goes on around the individual assets it owns in these markets, and that increases risk to some degree.
The explore portfolio
This unique collection of retail assets is the main thing investors need to look at, but it's not the only thing. In addition to these owned properties, Acadia also creates partnerships that buy similar assets it describes as "out of favor" and looks to "add value" by fixing them up. This is a much riskier effort, which helps explain why the REIT doesn't want to take on the costs all by itself. Bringing in partners helps reduce both the up-front cost of a redevelopment project and the risk, even if it dilutes returns to some degree.
The benefit of the partnership structure was notable in 2020, when the partnerships took $85 million worth of asset write downs. Only around $20 million of that flowed through to Acadia. However, it's also worth noting that the REITs core portfolio didn't suffer anywhere near the same level of write downs (around $400,000). So the risk mitigation built into the partnership model is good, but it doesn't completely shield investors from the inherent risks of such investments.
When you combine this bit of the portfolio with the urban and street level aspects of the core portfolio, you start to get the feel that risk-averse dividend investors would probably be better off avoiding Acadia. Which brings the dividend back into the story, since the suspension in 2020 took the dividend from $0.29 per share per quarter down to zero. In fairness, 2020 was an uncertain time and this wasn't the only REIT to make a call like that.
However, when the dividend came back in 2021, it was set at $0.15 per share per quarter, roughly half the previous level. Adjusted funds from operations (FFO), a REIT metric similar to earnings for an industrial concern, was $0.25 per share in the first quarter, so there's ample support for the lower payment. But it's worth noting that a return to the previous distribution would have pushed the adjusted FFO payout ratio above 100%, so a cut was a necessity, not just a precaution. Maybe Acadia is back on track, which wouldn't be shocking given the rebounding U.S. economy; however, there are risks this rough patch revealed that shouldn't be ignored.
Buy it or not?
As already stated, risk-averse (and probably even moderate) investors will probably want to stay away from Acadia. There are just too many risks associated with its unique property approach and partnership investments. That said, with risk can also come reward. And that might entice more aggressive investors hoping that the U.S. economic upturn leads to material improvement in the REIT's core portfolio and, perhaps, enhanced opportunities on the partnership side of things. Just go in knowing what you're buying, since this is not a plain vanilla retail landlord by any stretch of the imagination.