The COVID-19 outbreak caused devastation across much of the retail industry. Conditions were apocalyptic through much of the second quarter as governments forced many retailers to close their doors to help slow the spread of the virus. Because of that, many couldn't pay their rent, which had a significant impact on retail real estate investment trusts (REITs), as most could no longer afford to pay their dividends.
However, while market conditions have been abysmal, a handful of retail REITs have stood out for their durability. Leading the way are Agree Realty (NYSE: ADC), Federal Realty Investment Trust (NYSE: FRT), and Realty Income (NYSE: O). Here's why their resiliency makes them good retail REITs to buy for those seeking some exposure to this beaten-down sector.
About to go on a buying binge
Agree Realty collected an impressive 90% of its rent during the second quarter, with that rate rising to 94% in July. Several factors drove that above-average collection rate. One of the biggest is the makeup of its portfolio, which focuses on net lease properties prominently leased to essential retailers like home improvement and grocery stores and pharmacies, which remained open.
Meanwhile, the majority of its tenants (61%) have investment-grade credit, which gave them the means to continue paying rent. Because of that, Agree Realty's FFO rose during the quarter as it also benefitted from recent acquisitions. Those factors gave it the confidence to increase its dividend -- which now yields 3.6% -- during a time when many of its peers suspended theirs.
That durability during the second quarter's apocalyptic conditions is only part of the draw with Agree Realty. The company also has a fortress-like balance sheet -- including investment-grade credit and an ultra-low leverage ratio of 1.6 times debt-to-EBITDA -- which gives it the flexibility to keep making acquisitions. The company currently expects to buy between $900 million and $1.1 billion of properties this year, which should grow its FFO and help drive future dividend increases.
An elite dividend growth stock
Federal Realty Investment Trust only collected 68% of the rent it billed during the second quarter. That's largely because less than 55% of its shopping center tenants were open and operating during much of the period since it leases space to many nonessential tenants like health and beauty, fitness, apparel, and restaurants.
However, on a more positive note, 92% of its tenants were open and operating last month, which led to an improved rental collection rate of 76%. Further, the company reached deferral agreements with late tenants covering 10% of the unpaid second-quarter rent, which they should repay by year-end.
With its rental collection rates improving, Federal Realty had the confidence to increase its dividend once again. That marked its 53rd consecutive annual increase, which is the longest streak in the REIT sector.
Another reason Federal Realty had the confidence to increase its dividend -- which now yields 5.1% -- is that it has an elite balance sheet, including one of the highest credit ratings in the REIT sector and $980 million of cash at the end of the second quarter. That top-notch financial profile gave it the flexibility to keep paying its dividend even though not all its tenants can pay their rent. It also gives it the means to invest in development and redevelopment projects to enhance the value of its real estate portfolio by adding office and residential tenants to its mix of retailers.
Continuing to pay like clockwork despite the storm
Realty Income collected 86.5% of the rent it billed during the second quarter. Driving that above-average collection rate was the makeup of its portfolio, which, like Agree Realty, predominantly focused on net lease properties with essential retailers. It also has a high percentage (48%) of its properties leased to investment-grade tenants.
Because Realty Income's rental collection rate was solid during a turbulent quarter, the REIT has continued to pay its monthly dividend. It recently notched its 601st consecutive payout, which it has increased for an impressive 91 straight quarters. That latest raise pushed its yield up to 4.5%.
Another factor playing a key role in Realty Income's ability to keep increasing its payout is that the REIT also has an elite balance sheet. Its credit rating is right up there with Federal Realty as one of the highest in the REIT sector, backed by a conservative 5.1 times debt-to-EBITDAre ratio. That strong balance sheet gives it the flexibility to continue making acquisitions -- it's aiming to buy between $1.25 billion and $1.75 billion of properties this year -- which should continue growing its FFO and dividend.
Not all retail REITs are struggling these days
There's no doubt that times are tough for retail-focused landlords. However, Agree Realty, Federal Realty Investment Trust, and Realty Income withstood the current apocalyptic conditions because of their focus on leasing to essential businesses and their top-notch balance sheets. Because of that, they stand out as solid buys since they have the financial flexibility to continue expanding their portfolios, which should enable them to grow their FFO, dividends, and shareholder value.