The retail apocalypse has intensified this year. Governments closed nonessential retailers to help slow the spread of the COVID-19 outbreak earlier this year, leaving many unable to afford their rent and several others in such dire financial straits that they filed for bankruptcy. That had a massive impact on retail real estate investment trusts (REITs) as most slashed or suspended their dividends.
However, while the downturn has impacted most retail REITs, some are better positioned to weather this storm than others. Two of those standouts are Federal Realty Investment Trust (NYSE: FRT) and Kimco Realty (NYSE: KIM). With their stocks down sharply this year, both look like good contrarian buys on the prospect of an eventual recovery in the sector.
The king of retail REITs
Shares of Federal Realty Investment Trust are down about 40% on the year. Weighing on the stock has been the impact of COVID-19 on its financial results. The company only collected 68% of the rent it billed during the second quarter. As a result, its FFO declined from $1.60 per share to $0.77 per share.
However, market conditions have improved during the third quarter. Federal Realty collected 76% of the rent it billed in July and executed deferral agreements on 10% of the second quarter's uncollected rent. Meanwhile, it continued to sign new and renewal leases on existing space, which are coming in at much higher rates than expiring contracts. One factor driving those improvements is the company's prime retail real estate, which includes more than 100 well-located open-air shopping centers in eight densely populated markets.
Because of those positive trends, and its top-notch balance sheet, the REIT had the confidence to increase its dividend for the 53rd straight year. That's the longest streak in the sector as it's only one of 30 companies overall that have grown their payouts for more than 50 years. With its yield up to 5.3% after this year's sell-off, the REIT offers investors an appealing blend of income and upside potential on an eventual recovery in the sector.
A quick return of the dividend
Kimco Realty was one of several retail REITs that suspended its dividend earlier this year to preserve cash as governments forced nonessential retailers to close their doors. However, with rental collection rates improving (rising from 70% in the second quarter to 85% in August) thanks to the strength of its grocery-anchored portfolio of open-air shopping centers, the REIT brought back its dividend for the third quarter.
At $0.10 per share, it's a fraction of its former quarterly rate of $0.56 a share. However, with Kimco's shares tumbling almost 40% this year, the reset rate's yield is nearly double the market's average at 3.2%. Further, the company anticipates increasing its payout in the coming quarters. CEO Conor Flynn stated that:
Declaring our dividend at this initial level accounts for the dividends already paid in 2020 and reflects continued focus on maintaining a strong balance sheet and financial flexibility. The board will continue to monitor Kimco's financial performance and intends to declare additional dividends on common shares in 2020, as needed, of at least the minimum amount required to maintain compliance with Kimco's REIT taxable income distribution requirements. We expect to establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income in 2021.
Add that income upside to the potential rebound in its stock price, and Kimco Realty could produce strong total returns in the coming years as the retail sector stabilizes post-COVID-19.
Get paid well to wait for the retail recovery
After slashing their payouts during the first half of the year, retail REIT dividends are making a comeback. Leading the way are Federal Realty and Kimco Realty, which were able to send their investors more cash thanks to their high-quality portfolios and top-notch balance sheets. Those moves suggest the worst is in the rearview mirror for these REITs, making them great buys for patient investors as they get paid well to wait for the eventual recovery in their stock prices as market conditions continue improving.