It's one thing to own a building, but it's another to own an entire city. While that's a bit of an exaggeration of what Federal Realty Investment Trust (NYSE: FRT ) does, it isn't far off the mark. This sets the company apart from competitors and provides built-in growth potential.
Building a town
It's not unusual for a home builder like PulteGroup (NYSE: PHM ) to put up hundreds, if not thousands, of houses in a development. What Pulte and the other homebuilders create is nothing short of amazing.
Pulte offers homes for first-time buyers, move-up buyers, and active adults. While its communities vary, they often have amenities like pools, tennis courts, and club houses. The idea is to build more than just a Levittown-style row of buildings. But houses don't make towns, you need more.
Disney (NYSE: DIS ) took a stab at that. The company had excess land near its Walt Disney World resort that wasn't suitable for its parks' business; so, under Michael Eisner it set about building a real town. The town, called Celebration, was started in the mid-1990s and included homes, apartments, a downtown shopping area, office buildings, a post office, a school, a hospital, community amenities, and more.
Disney has since divested itself of any ownership. While some may argue about whether or not it has worked out as planned, the company proved that an entirely new town could be built from the ground up. Disney's media and amusement businesses, which are both industry leaders, are clearly the driving force at the company. However, it hasn't lost the urge to build and subsequently started construction of a more traditional housing project called Golden Oak.
When Pulte builds, it has to actively sell its properties. When Disney started selling Celebration's homes, it had more demand than supply. The Disney name was a huge draw and helped to make the town what it is today. It's not something that can be easily replicated. However, Federal Realty has successfully been building what amounts to small cities without the need for Disney's name.
The difference is that Federal Realty brings together housing, amusement/shopping, and office/business properties in affluent areas where people want to live, but with tighter, centralized controls -- much like a housing development with written standards or Disney's Celebration, which has a governing body setting and upholding community rules. In Federal Realty developments, however, it is a landlord calling the shots and making sure the "city" remains a nice place to live.
Building a community is a big risk. Federal Realty openly admits that such mixed-use projects are more complex and time-consuming to build than putting up a single-use building. However, it believes the returns are superior and more enduring.
For example, it says that residential rents are 25% higher where it's "mini-cities" are located. In addition, office rents are over 10% higher and hotel revenues are up to 40% above the local market. Once a project is stabilized, expansion projects are far less risky, and in many cases, built into the long-term plan. For example, construction of the five phases at Bethesda Row spanned more than a decade.
Federal Realty CEO Donald Wood summed up 2014 by saying, "this was a very good year, and it sets us up beautifully to really create a lot of real estate value along with earnings over the next few years." In fact, the company increased its 2014 guidance during its full-year 2013 conference call. That continues a long streak of top line growth, including the 2007 to 2009 recession. And, more important to income investors, the dividend has been increased regularly for more than 45 years.
A different beast, but a beautiful one
Building true communities where people work, live, and play isn't easy -- a fact that Disney's Celebration proves. But Federal Realty has managed to do it time and time again. Moreover, this REIT has built a pipeline of growth projects at existing facilities. This is truly a differentiated property owner and is worth a deeper look.
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