These Mall REITs Have Reinstated Dividends, but They Are Still Risky

It would be stating the obvious that the current pandemic and the sharp drop in economic activity took a toll on a number of companies during the June quarter, leading a number of them to cut or suspend their dividend payments to preserve cash. It is quite understandable, given the unknowns at the time -- including the length and severity of the pandemic, how prolonged and deep the economic impact would be and the combination of the two on a company's business. Over the last few months, the economic data has rebounded and the number of unemployed have fallen, and data published by Datex Property Solutions shows overall rent collection has improved to 77% from around 54% in April. Despite that improvement, the firm notes that some tenants, particularly from the apparel, fitness and theater categories, have continued to struggle with payments. This is not exactly a surprise, given the recent box office figures that point to only a modest return of moviegoers to theatres -- and while retail sales have improved, Morgan Stanley recently noted that foot traffic to brick-and-mortar stores selling primarily discretionary goods, including apparel retailers, was down as much as 43% year over year in July. And with the lapse in pandemic economic payments at the end of July, a portion of the domestic population is once again in a financial bind, living paycheck to paycheck or racking up credit card debt. Odds are this means brick & mortar spending remained under pressure in August, and we should have a better sense of that when the August Retail Sales report is published on Sept. 16. What the above likely means is that retailers will continue to reassess their brick & mortar footprint, while landlords do the same with their existing pool of tenants. Barring a second round of stimulus, however, the risk of a pickup in permanent store closings in the coming months remains, according to Sandy Sigal, CEO of NewMark Merrill Companies, which owns and manages shopping centers and retail properties in three states, including more than 50 in California. To be fair, I've been bearish on mall operators like Simon Property Group for some time, largely due to the shift to digital shopping that has been hitting retailers. But as we all know, the pandemic has not only accelerated that shift, it has also led to the collapse in brick & mortar foot traffic and sales mentioned above -- and that is pressuring those real estate investment trusts (REITs) that are mall operators. When we look back on this, we will likely see a sea change in the tenant pool, with financially weaker companies going by the wayside while viable or vibrant ones with better balance sheets opportunistically expand. Amid that transition, however, there is likely to be some pain for those mall operators. Compounding the issue, in a bid to appease dividend investors, they may reinstate their dividends but at a fraction of what they once were. Case in point is Kimco Realty , one of North America's largest owners and operators of open-air, grocery-anchored shopping centers and mixed-use assets. After having suspended its common share dividend during the pandemic, the company recently reinstated a quarterly cash dividend at $0.10 per share. On the one hand, that is a positive development, but on the other, that new dividend compares to the prior quarterly dividend payment of $0.28 per share, and only offers a yield of more than 3% vs. the 1.7% to be had with the S&P 500. Let's remember that in order to maintain its status as a REIT, a company must pay out at least 90% of its taxable income to shareholders, usually in the form of quarterly or monthly dividends. This means Kimco is likely to generate a minimum of $0.44 per share in taxable income over the coming four quarters, which compares to the current $0.47 per share consensus for the four quarters ending in June 2021. This realization could pressure KIM shares following their 63% move since bottoming out in late March. The smaller quarterly dividend associated with Kimco could also be a harbinger of shrinking dividends to come at other single-tenant-focused REITs that have a high concentration of retail exposure, or ones like Simon Property Group that are focused on shopping, dining, entertainment and mixed-use destinations that are better known as malls. Two such REITs that have yet to announce dividend cuts -- and are therefore worth watching -- are Regency Centers and Spirit Realty Capital , which currently offer investors dividend yields of 5.7% and 6.9%, respectively. Time will tell if those rich yields are warning signs or not.

These Mall REITs Have Reinstated Dividends, but They Are Still Risky

Kimco Realty and some peers in the Mall REIT space may have their dividends back in place, but the long-term economic impact of the pandemic is yet to be fully felt.

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