With ownership interests in 202 properties held through its core portfolio and fund investments, Acadia Realty Trust (AKR) is a diversified retail REIT despite its relatively small capitalization of around $1.47 billion, notes Nikolaos Sismanis, editor of Top 10 REITs.
We like Acadia Realty Trust for various reasons, but the most prominent ones include the following:
- The company's proven ability to generate robust results during uncertain economic periods
- Its high yield and well-covered dividend
- The stock's attractive valuation
Regarding its results, Acadia Realty Trust's performance has stood out over the past few years, despite retail properties in general having a hard time. Prior to the pandemic, REITs in the space suffered as e-commerce was gradually gaining ground over retail, while during the pandemic, retail properties were brutally affected by prolonged lockdowns.
Nevertheless, Acadia managed to generate robust cash flows during this period. For context, from 2016 to 2021, Acadia's FFO/share hovered between $1.25 and $1.44, despite the wild swings that the industry experienced.
Year-to-date, Acadia's portfolio of retail properties has remained highly occupied, setting the stage for the company to end the year on a high note. Specifically, for FY2022, management expects FFO/share to land between $1.28 and $1.30. At the midpoint, an FFO/share of $1.29 implies a year-over-year of 3.2%, which is a rather solid result given the ongoing macro headwinds.
Moving forward, we expect Acadia's performance to remain vibrant due to the company featuring some great characteristics. Firstly, Acadia features what is widely considered a "safe haven" component in retail properties-exposure to necessities.
Specifically, roughly half of its suburban shopping centers are grocery-anchored, while 40% of its annual base rent pertains to essential retailers. Hence, foot traffic is significantly less correlated to consumers' purchase power than your average retail REIT, which can be a great advantage if inflation keeps hurting discretionary spending in 2023.
Additionally, Acadia's main tenants comprise high-quality, credit-worthy retailers with transparent financials, including Target (TGT), Walgreens (WBA), TJX Companies (TJX), and Lululemon (LULU), amongst others, which are not going to fail to meet their rental obligations.
Further, Acadia' has some noteworthy growth prospects, including rental hikes embedded in its leases and an expansion pipeline exceeding $50 million.
As far as Acadia's dividend goes, at an annualized rate of $0.72, it remains well-covered based on this year's FFO/share projections. It also implies a yield of 4.9% at the stock's current price levels. The yield is somewhat substantial and should increase the predictability of investors' total return prospects.
The 4.9% dividend yield, combined with our view that shares are trading at a modest discount, should provide investors with an above-average margin of safety as well. The stock is currently trading at a P/FFO of roughly 11.4X.
This could imply the possibility of valuation tailwinds as well, considering we find shares fairly priced at a P/FFO of around 13.5 on a medium-term basis. All points considered, we believe Acadia is well-positioned to serve conservative, income-oriented investors quite adequately moving forward.