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Want a Dividend You Can Trust? Try Federal Realty Investment Trust

By Reuben Gregg Brewer – Updated Sep 11, 2020 at 9:06AM

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This retail-focused REIT is getting hit today, but its history says a lot about its commitment to the dividend.

Real estate investment trusts (REITs) have been cutting dividends left and right because of COVID-19. But a few landlords, including Federal Realty Investment Trust (FRT), have bucked that trend. Here's why Federal Realty has a dividend you can trust today, even though times are tough in the land of REITs.

Making a statement

Some very notable real estate investment trusts have cut their dividends in the face of the pandemic, including giant healthcare REITs Welltower and Ventas, a slew of hotel owners and mortgage REITs, and large retail landlords like Simon Property Group and Brixmor Property Group. Federal Realty was not on the list of dividend cutters. In fact, it announced a dividend increase in August. 

A cow colored piggy bank with coins around it

Image source: Getty Images.

To be fair, it was a token increase of just $0.01 a share. That amounts to less than 1%. However, given the backdrop of COVID-19, the goal of that hike was to make a statement, not materially increase the distribution.

Notably, Federal Realty has now increased the dividend for 53 consecutive years, a record unmatched by any other REIT. According to CEO Donald Wood, "Continued positive trends in our collections, our fortress balance sheet built for times like these and, most importantly, the continued desirability of our locations, as evidenced by current tenant discussions, gave us the confidence this quarter to increase our dividend." 

Although that sums up pretty nicely why investors can trust in Federal Realty's dividend, it pays to dig in a little bit more.

What's been going on

At the worst of the economic shutdowns that were used to slow the spread of COVID-19, Federal Realty was collecting just over half of the rent it was owed. But a lot has changed since April and May, with the U.S. economy pretty far along in the reopening process at this point.

When the REIT reported second-quarter earnings, it noted that rent collection was roughly 75% in July, with nearly 90% of its tenants open for business (up from about 50% at the start of May). Although the hit from the pandemic was material, it appears to have been relatively short-lived and is quickly abating. 

Meanwhile, Federal Realty's balance sheet is rock solid. For starters, it has one of the highest credit ratings in its peer group (and of any REIT, actually). Secondly, its financial debt-to-equity ratio is at the lower end of the strip-mall sector.

Like many of its closest competitors, it added debt to ensure it had enough liquidity to muddle through the current headwinds, but the added leverage hasn't been a material issue. Moreover, the company is confident in its ability to sell equity in the future to help pay down debt if it needs to. And now that the worst of the pandemic appears to have passed, the goal is to start reducing leverage. 

FRT Dividend Yield Chart

FRT Dividend Yield data by YCharts.

The third highlight from Wood was the quality of Federal Realty's assets. In the second quarter, the worst of the COVID-19 downturn, the REIT signed 50 leases. It was able to increase rents on those new leases by an average of 11%.

Clearly, companies want to be in the REIT's properties. This makes sense since Federal Realty has a carefully curated list of roughly 100 locations in high-barrier-to-entry markets with wealthy and dense populations. Although frightened investors have punished the stock, the value of the assets Federal Realty owns is still high in the eyes of its tenants. 

Worth a close look

Federal Realty's dividend yield is 5.4% as of Thursday's close, near the highest levels of the past decade. The last time the yield was this high was during the 2007-2009 recession. The REIT has a strong business that's starting to recover from what's turned out to be a brief COVID-19 hit. Long-term income investors looking for a reliable dividend payer should strongly consider digging into this REIT's long-term story while short-term thinking is still depressing its shares.

Reuben Gregg Brewer owns shares of Simon Property Group and Ventas. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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