Shopping Center REITs - Dividend Outlook 2021

Most of the shopping center REITs have suspended their common dividends.
Payout ratios were far too high anyway, averaging 97% of 2019 AFFO.
A review of dividend tax allocations provides helpful insight.
An expected dividend 'reset' to sustainable levels will come in 2021.

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A Quick History of Shopping Center REITs
Shopping center REITs represent an established category within the REIT space, dating back to Federal Realty's (NYSE: FRT) IPO in 1962. Typically anchored by a grocery store, these local community centers are a suburban mainstay and historically churned out 3% NOI growth like clockwork. Yet there has been stress on the shopping center REITs over the last few years, resulting in elevated dividend payout ratios. These problems can be attributed to three general areas:
The trend toward lower leverage is dilutive to cash-on-cash returns. For example, Retail Opportunity (ROIC) went from 9.5x Net Debt/EBITDA in 2012 to 7.1x in 2019. That's a tough headwind for dividends, even as the ROIC portfolio performed well. Portfolio cleanups have been expensive. Acquisition sprees left more than a few REITs with far-flung portfolios and complicated JV structures. Shopping center REITs have now embraced the Federal Realty model - fewer centers, upscale demographics, and constant reinvestment to remain competitive. Kimco's (NYSE: KIM) downsizing from 888 properties in 2012 to 409 properties at the end of 2019 illustrates the dramatic shift in portfolio composition, echoed by SITE Centers' (NYSE: SITC) 62% decrease in store count over the same time frame. Backfilling tenant vacancies requires capex dollars. Shopping center REITs have done a decent job of maintaining occupancy in a weak retail environment. But recurring capex spending for tenant improvements and leasing commissions has been high. For the REITs profiled in our shopping center group, recurring capex increased from 12.0% of EBITDA in 2015 to 17.5% for 2019. This reduces... Read more