Market conditions in the retail industry have gone from bad to worse this year as the COVID-19 outbreak fanned the retail apocalypse's flames. The environment has gotten so treacherous that many retailers have started withholding rent to conserve cash. That decision has had a nasty trickle-down impact on REITs focused on owning retail properties, as many suspended their dividends to preserve liquidity.
However, a few holdouts have maintained their payouts, at least for the time being, including Simon Property Group (NYSE: SPG), Regency Centers (NYSE: REG), and Federal Realty Investment Trust (NYSE: FRT). Given the sector's issues, these dividends are on dangerous ground.
A strong hint
Leading mall owner Simon Property Group has been coy about what it intends to do with its dividend. The company said that it plans to declare its next payment before the end of June and will continue paying all cash instead of some mixture of cash and stock, which was the route of fellow mall-owner Macerich (NYSE: MAC).
However, one thing Simon Property Group didn't commit to doing is maintaining its current rate. In discussing the payout on the first-quarter call, CEO David Simon stated: "As a point of reference, there had been over 175 public companies who have either suspended or reduced their common stock dividend by 50% or more. We will not be one of those companies." Those comments still leave room for a reduction of up to 49%, suggesting that investors shouldn't bank on the company's nearly 10%-yielding payout. A cut of some sort seems likely since many tenants didn't pay rent in April and March, including clothing retailer GAP (NYSE: GPS), which Simon recently sued in hopes of forcing it to pay up.
All eyes on the retail recovery
Regency Centers, which is one of the largest owners of open-air shopping centers, declared its latest dividend in May. At the current rate, the company yields about 4.4%.
On the one hand, Regency Center has an extremely strong balance sheet with low leverage and payout ratios. However, given the conditions in the retail sector, CEO Lisa Palmer stated on the first-quarter call:
Over the coming months, management and the Board will carefully monitor the extent and success of the opening of the country and economy, consumer behavior, retailer performance, actual Regency results, and our view of future rent collection and NOI…I want to emphasize that the resulting future major decisions will be very deliberate. This includes the decisions related to the level of the quarterly dividends, where we must, and we will weigh near-term liquidity and balance sheet metrics with future expectations for Regency's portfolio, including preserving our financial strength to best position us for achieving our strategic objectives and sustained outperformance.
Thus, if retail sector conditions don't improve -- including Regency's rent collection which was just 68% in April and 58% in May -- the company might need to reduce its dividend to ensure the strength of its balance sheet.
Hoping for another increase but bracing for the worst
Federal Realty Investment Trust has been an amazing dividend stock over the years. The REIT has increased its dividend for 52 consecutive years and recently bucked the retail sector trend by declaring its next payout.
However, CFO Dan Guglielmone was cautious with his comments about the dividend on the first-quarter conference call. He said that "given the strength of our balance sheet and liquidity position, our goal is to maintain a cash dividend and push our 52-year record of increasing dividends to 53." However, he also advised that "the management team and our Board of Directors will be extremely disciplined in setting our dividend policy as we navigate moving forward."
One area of concern is that the company only collected 57% of the rent it billed in April and 54% of May's rent. If those numbers don't improve, or several tenants file for bankruptcy, Federal Realty might need to adjust its 4.1%-yielding payout.
In the danger zone
Simon Property Group, Regency Centers, and Federal Realty were among the few retail-focused REITs that maintained their payouts this year. However, those payouts are on shaky ground given the low rental collection rates they've experienced over the past couple of months. If those rates don't improve, these REITs might reduce their dividends, with Simon standing out as the most likely candidate for a cut.