It's tough right now for retail-focused real estate investment trusts (REITs) like Federal Realty Property Trust (NYSE:FRT). But the COVID-19 headwinds the company is facing will, eventually, fade. And when they do, this landlord should quickly recover. Right now is the time to buy while its stock is still on sale.
Federal Realty's dividend yield is a generous 5.3% today. That compares to less than 2% for the S&P 500 Index and 3.7% for the average real estate investment trust, using Vanguard Real Estate Index ETF as a proxy. In addition, the yield is near its highest levels since the deep 2008-09 recession. In fact, over the past decade, this is the first time that the yield has risen above 3.6%. Using yield as a rough proxy for valuation, Federal Realty looks pretty cheap right now.
There's a good reason for the relatively low price (and high yield) -- the stock is down 38% so far in 2020. That's the economic impact of the closure of non-essential businesses to slow the spread of COVID-19 and social distancing by consumers. Basically, people are staying home more, and that's kept them out of the retail stores that fill Federal Realty's properties. This is clearly bad news, with the REIT's rent collections dropping by nearly 50% during the worst of the economic downturn that started in early 2020.
Looking on the bright side
Despite the deep downturn earlier in the year, things are already getting better. Federal Realty management recently highlighted that tenants who filling nearly 95% of the square footage it owns are back up and running. Rent collection in the third quarter averaged 83%, with monthly rates likely increasing each month through the three-month span, as has been the case with other retail REITs. This represents a return to more normal operating performance.
While there's a still-significant way to go before normal is reached, Federal Realty has some clear tailwinds. For example, the REIT's roughly 100 or so shopping centers and mixed-use developments are open-air. That should make them more attractive to consumers worried about the spread of COVID-19 in enclosed spaces. In addition, more than 75% of its locations have grocery stores as anchors and house the types of businesses that consumers visit on a regular basis. In other words, these are the types of assets that customers are likely to return to rather quickly.
However, the biggest draw here is that Federal Realty's curated list of properties is largely located in what it calls the first ring of city suburbs. Effectively, that means its shopping centers are near dense populations with residents who generally have higher-than-average incomes. These are the types of locations that retailers want to be in. To put a number on that, despite the headwinds, Federal Realty was able to sign 50 new leases in the second quarter.
But there's more to that story. Of those new leases, around 90% were for space that was previously occupied. On average, the REIT was able to get 11% higher rents on that space. Lease signings tend to be lumpy, but the ability to increase rents during the worst of the downturn shows the strength of Federal Realty's well-located portfolio. As the world learns to live with COVID-19, it is highly likely that this REIT's business will start to thrive again.
Show me the money
In a sign of confidence, Federal Realty's board recently announced a dividend increase. It was modest, but it increased the REIT's annual streak of dividend hikes to an incredible 53 consecutive years. That puts it in very rare company, and it is the longest streak of any REIT. Dividend investors looking for an out-of-favor high-yield stock with a long history of putting investors first would be wise to add Federal Realty to their shortlist while it's still on sale.