Acadia Realty Trust (AKR) is an equity REIT aiming to deliver long-term, profitable growth through its dual – Core Portfolio and Fund – operating platforms and its prudent, location-driven investment strategy.
As of its latest quarterly filings, the trust has ownership stakes in 188 locations within its Core Portfolio. Some of these properties are 100% owned, while others are partially owned through joint venture interests.
Through its funds, which are investment vehicles via which the company’s operating partnership can invest in primarily opportunistic and value-add retail real estate, the company has an economic interest in an additional 52 properties. In general, Acadia’s properties primarily comprise street, urban retail, and suburban shopping centers.
These real estate classes have been the hardest to manage over the past few years. Shopping centers suffered during the pandemic amid softer foot traffic, while retail locations continue to be pressured by growing e-commerce sales.
There is an exception when it comes to locations that have grocery stores and other necessity-type stores anchored, which is a strategy retail REITs have been lately employing to generate more resilient results. However, this is not the case with Acadia, which houses mostly consumer-discretionary-type tenants (e.g., Lowe’s (LOW), Bed Bath & Beyond (BBBY), GameStop (GME), etc.)
I am neutral on the stock.
Recent Performance
Acadia stepped into Fiscal 2022 on a high note, with the company showing continuous recovery momentum coming out of the pandemic. In Q1, revenues came in at $81.5 million, 17.5% higher year-over-year. The notable increase was due to Acadia’s retail properties being still affected by restrictions related to COVID-19 in the comparable period last year.
Acadia’s Core Portfolio recorded an increase of 9.7% in same-property NOI (Net Operating Income) compared to Q1-2021, which was powered by rent commencements on new leases and sounder credit conditions. More specifically, the Core Portfolio was 90.5% occupied and 94.1% leased at the quarter-end, showing improvements from 90.0% occupied and 93.2% leased in the previous quarter.
Therefore, we can tell that the retail property market still shows some weakness amid vacancies. Still, cash collections exceeded 98%. Thus, it doesn’t appear that Acadia’s tenants are struggling to pay rent, nevertheless.
During the three-month-period, Acadia’s Fund platform closed $380 million worth of acquisitions while its acquisition pipeline remains strong. Further, FFO came in at $35.4 million, or $0.36 per share, including:
- $3.6 million, or $0.04 per share, related to the unrealized mark-to-market loss on Albertsons, and
- $1.5 million, or $0.01 per share, from the disposition of its stake in Self Storage Management.
This compares with an FFO of $24.0 million, or $0.26 per share, in Q1 2021. Following a slightly better-than-expected performance, management raised its FFO per share outlook for Fiscal 2022. The company now estimates that FFO/share will land between $1.17 and $1.32 for the full year, up from $1.15 to $1.31 previously.
Dividend Growth Prospects
While Acadia cut its quarterly dividend from $0.21 to $0.18 during the Great Financial Crisis, the company proceeded to raise it gradually through 2020, when it reached $0.29. Following the impact of COVID-19 in retail locations, however, Acadia was once again forced to cut it in the midst of the pandemic.
In February, the quarterly dividend was raised by 20%, from $0.15 to $0.18, yet it still remains at the same levels as between 2009 and 2012.
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Based on the midpoint of management’s FFO/share outlook (about $1.25) and the current dividend run-rate ($0.72), the payout ratio stands at a rather comfortable 58%. Thus, it’s quite likely that aggressive dividend hikes like last February’s increase could persist in the short term.
However, I doubt Acadia’s pre-COVID dividend levels ($0.29/quarter, $1.16/year) will resume quite soon unless the company wishes to distribute the majority of its earnings.
On the one hand, there are some positive catalysts for the company to grow its FFOs and, therefore, the dividend, including robust leasing activity. In Q1, for instance, Acadia’s Street portfolio’s GAAP and cash leasing spread rose to 10.6% and 7.8%, respectively, on 25 comparable new and renewal leases.
On the other hand, the retail real estate industry continues to face headwinds, the macroeconomic environment remains uncertain (consumer spending on discretionaries could decline), and occupancy softness persists on some level.
Hence, Acadia’s FFO/share growth prospects may not be that exciting, resulting in the annual dividend run-rate potentially capping close to $1.00 this time. This should not surprise investors, as, after all, Acadia’s FFO/share has been more or less flat for nearly a decade.
Wall Street’s Take
Turning to Wall Street, Acadia Realty Trust Stock has a Moderate Buy consensus rating based on a single Buy assigned in the past three months. At $27.00, the average Acadia Realty Trust price target implies 46% upside potential.
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Takeaway
Acadia Realty Trust’s performance has been improving from the headwinds resulting from the COVID-19 pandemic. Following the dividend cut in 2020, the company appears to have sufficient room to pursue further dividend increases from its current quarterly rate.
That said, challenges in the retail real estate space remain. Thus the long-term prospects of the company, especially in terms of growing its FFO/share, are rather uncertain.
In any case, at a forward P/FFO of 14.8 (based on the midpoint of management’s FFO/share guidance), I believe the stock could be somewhat overvalued. I would also require a higher yield before allocating capital to the stock.
The current 3.9% yield is rather noteworthy but may not be enough to compensate for the underlying risks, even though payouts are indeed likely to grow in the short term.