This year has been brutal for retail real estate investment trusts (REITs). Their rental collection rates fell off the table in April as governments shut down nonessential businesses. That forced most retail REITs to slash or suspend their dividends.
However, rental collection rates have improved dramatically over the past couple of quarters as governments lifted restrictions on nonessential businesses. Because of that, an increasing number of retail REITs are sending more cash to their investors.
Recovering from the apocalypse
Retail REITs focused on shopping centers only collected 50.3% of the rent they billed in April, according to a survey by Nareit. That number got even worse in May, falling to 49.3% as government-imposed lockdowns dragged on in many areas. Meanwhile, REITs focused on free-standing retail properties (i.e., net lease) fared slightly better as they collected 72.6% of the rent they billed in April and 70% of May's total. June was a bit better as shopping center receipts topped 60% while free-standing REITs collected almost 80% of their billings.
Meanwhile, the third quarter has shown even more improvement. Shopping centers collected 72.8%, 80.2%, and 81.6% of the rent they billed in July, August, and September, respectively. Meanwhile, REITs focused on free-standing properties received 90.9%, 90.5%, and 94.9% of the rent they billed during those three months. Both groups have also experienced a decline in rent deferral and forbearance requests.
REIT confidence is increasing with the rental collection rate
The plunging rental collection rates during the second quarter forced many retail-focused REITs to take action to preserve their financial flexibility. Among the moves many made was suspending their dividends. Two that put their payouts on ice were Kimco Realty (NYSE: KIM) and Retail Properties of America (NYSE: RPAI).
When Kimco reported its first-quarter results in early May, the grocery-anchored shopping center owner noted that it had collected 60% of what it billed in April while receiving deferral requests for 35% of that month's rent. Because of that, the company suspended its dividend. However, by the time it reported its second-quarter results in early August, Kimco's collection rate had improved to 70% for the second quarter and 76% for June. Those numbers continued trending higher in July (82%) and August (85%). That improvement gave the REIT enough confidence to reinstate a dividend at $0.10 per share. While that was below its prior rate of $0.28 per share, the company said it would normalize the payout next year as long as its rental collection rate continued heading in the right direction.
Retail Properties of America also suspended its dividend when its rental collection rate cratered during the second quarter. When the open-air shopping center owner reported those results in late July, it had only collected 68.4% of the rent it billed during that period and 71.4% in July. However, by early September, its July collection rate had improved to 76% while August's stood at 77%. Because of that, the company brought back a dividend at $0.05 per share. Again, while that was well below its previous rate of $0.1656 per share, the REIT intends to grow it as conditions normalize in the coming quarters.
Meanwhile, the higher collection rates by REITs focused on free-standing properties allowed most to maintain their payouts during the toughest months. Now with conditions improving, they're able to return even more cash to shareholders. For example, Realty Income (NYSE: O) reported earlier this month that it collected 93.8% of September's rent, which was a slight improvement from July (92.5%) and August (93.6%) and even further above the 88.3% it collected during the second quarter. Because of its higher overall receipt rate and improving collection trend, the REIT declared its 108th consecutive quarterly dividend increase and 603rd straight monthly dividend payment.
Not so apocalyptic anymore
COVID-19 made conditions in the retail sector turn truly apocalyptic during the second quarter as many stores had to shut their doors to slow the spread. However, with governments having lifted most of those restrictions, retailers can now ring up sales, giving more of them the cash to pay their rents. Because of that, a growing number of retail REITs are more confident in their finances, leading them to return more money to shareholders. That suggests that the worst could be over for the sector, making it more attractive for investors looking for bounce-back candidates since the average retail REIT has lost almost 40% of its value this year.