Shares of real estate investment trust (REIT) Federal Realty Investment Trust (NYSE:FRT) fell a painful 35.9% in March according to data from S&P Global Market Intelligence. That was materially worse than the broader market, where the S&P 500 Index declined around 13%, and the average REIT, as measured by Vanguard Real Estate ETF, which was down 20%. The big reason for all of these declines was COVID-19. The fall at Federal Realty was driven by the fact that the quickly spreading illness could have long-term implications for its business.
Federal Realty is often touted because of its mixed use centers that bring retail, apartment, and office/work assets together in one place. That is a material and important part of its business (about 36% of net operating income), but at its core it is still basically a retail REIT. That said, it has a focused portfolio of well-located properties and is highly regarded on Wall Street. Still, COVID-19's impact could materially upend even the best-positioned retail properties.
In an effort to slow the spread of COVID-19, the U.S. government has pushed social distancing measures, including the closing of non-essential businesses. Although many of Federal Realty's properties are anchored by tenants that can remain open (like grocery stores), the tenants around those stores are likely to be shuttered. So, there's a chance that Federal Realty will have a hard time collecting all of its rents. That, in turn, would make it hard for the REIT to pay its own bills. Investors are concerned that this situation could lead to a dividend cut.
The bigger problem is that many of the smaller tenants at Federal Realty's properties may not have the financial strength to survive an extended shutdown. So despite having a well-located portfolio of properties, occupancy could notably fall once COVID-19 social distancing measures ease. Federal Realty is highly likely to survive this period, but what its business looks like on the other side is far from certain today.
Federal Realty has long traded at a premium price to its peers. The price decline in March didn't change that, as weaker peers fell more, but it did push Federal Realty's price down to an area where more aggressive income investors might want to start sniffing around. That said, there's a lot of uncertainty here (including the very real risk of a dividend cut). Risk averse income investors should probably wait until there's a bit more clarity around the long-term impact of COVID-19. But if you can stomach the uncertainty, now could be an opportunity to pick up a well-run retail REIT at a decent price. You just have to know going in that its business could look very different a year from now and, perhaps, not in a good way.