It wouldn't be a stretch to suggest that pandemic-hit 2020 was a tough year for retail landlords like RPT Realty (NYSE: RPT). As 2021 has gotten underway, however, this real estate investment trust (REIT) has repositioned itself for growth. Does that mean its troubles are over? It's not clear just yet.
A bad year
You know it's tough when a real estate investment trust suspends its dividend, like RPT Realty did for three quarters in 2020. To be fair, the landlord owns a collection of around 50 retail properties, which wasn't a great place to be last year. That said, with roughly two-thirds of its strip mall properties anchored by grocery stores, investors might have expected the REIT to be a little more resilient. Even as nonessential businesses were shut down by government mandate, grocery stores were allowed to continue operating.
Still, it was an uncertain time, and taking a cautious approach probably made sense. Note, however, that the REIT's full-year 2020 operating funds from operations (FFO) came in at $0.78 per share. That wouldn't have been enough to cover the full-year run-rate of the $0.22 per share first-quarter dividend.
As 2021 has gotten underway, however, RPT Realty has brought the dividend back at $0.075 per share per quarter. That's a much lower rate, but it appears easily sustainable given first-quarter operating FFO of $0.19 per share. The thing is, a lot has changed at RPT Realty over the past year or so.
Not in trouble, but...
Stepping back and looking at the big picture, it appears that RPT Realty has managed through the worst of the pandemic hit. So it wouldn't be fair to say that the REIT is in trouble. The longer-term recovery path here, however, is probably not one that many investors will want to be involved with.
RPT Realty is pretty small, which it claims allows it the opportunity to outmaneuver larger peers. It is looking to do that with three distinct growth levers. First is the core portfolio of owned shopping center assets. That's pretty simple to understand. However, in late 2019, it created a joint venture with a foreign wealth fund to invest in shopping center assets. And it just created another joint venture with a number of partners to own single-tenant net lease properties. This is definitely not the norm for larger shopping center REITs, and these two partnerships need close monitoring.
There are pluses and minuses to each. For example, the shopping center partnership gives RPT Realty access to additional capital for acquisitions. And it allows the REIT to generate management fees from running the assets it buys on behalf of the partnership. RPT Realty was also able to raise capital for itself by selling some of its existing assets to the partnership. However, there's an inherent conflict of interest here, given that the REIT will effectively compete with the partnership for investment opportunities. So it could help spur growth, but investors really need to take a "trust but verify" approach here.
The net lease partnership isn't competing with RPT Realty, but there is an interesting complication. The basic idea is that RPT Realty will subdivide some of its properties to create single-tenant net lease assets and then sell those to the recently created partnership. That's an interesting way to unlock value in RPT Realty's portfolio, but it's hardly a simple way to do it. And, given that it's still early on, it's not a proven model just yet. Again, investors need to keep a close eye on this effort.
Risk vs. reward
It looks like RPT Realty has managed to get through the pandemic in one piece, including the reinstatement of a dividend. In that regard, the future looks a lot brighter than the recent past. That's the good news. The bad news is that RPT Realty has some creative efforts in the works to spur growth that are a little bit outside the box in the strip mall space. That's not inherently bad, but risk-averse investors will probably feel more comfortable with a more plain vanilla approach. More aggressive types, meanwhile, will want to closely monitor the partnerships RPT Realty has inked, at least for a few years, to make sure they pay off as hoped. All in all, this relatively small shopping center REIT is likely to be an acquired taste.