The market has been heading higher lately, but real estate investment trust (REIT) Federal Realty Investment Corp. (NYSE:FRT) is still down nearly 30% from its early-2020 highs. Looking a little further back, it's roughly 45% lower than the peak it achieved in 2016. There's good news and bad news here -- but if you are looking for a cheap stock as the broader market rallies to new highs, Federal Realty still seems like it's in bargain territory. 

The claim to fame

One of the most incredible things about Federal Realty is that it has increased its dividend annually for more than five decades without fail. That puts the real estate investment trust into Dividend Aristocrat territory. You don't create that kind of dividend record by accident -- it requires a long-term commitment to returning value to investors via cash distributions, and, even more importantly, an effective management strategy and team. Fifty years is a long time, and Federal Realty has deftly handled the ups and downs and management transitions all along the way. 

A scale weighing blocks that spell out the words risk and reward.

Image source: Getty Images.

So this REIT is not a fly-by-night company or a young upstart trying to prove itself. Investors can rest assured that, based on the history here, Federal Realty is working with your best interests at heart. That also shows up in its highly focused property portfolio, which includes roughly 100 shopping centers and mixed-use developments. That's fairly small given the company's long history. However, Federal Realty has long focused on quality over quantity.

Those 100 properties are specifically located in wealthy and dense areas near major cities. To put some numbers on that, on average there are 170,000 residents with household earnings of around $127,000 a year within three miles of its centers. These are the types of places that can attract customers and tenants. Moreover, its mixed-use developments offer long-term investment opportunities because they are generally built in stages. So there's growth built into the portfolio as well. 

There's a problem here

So far there's a lot to like about Federal Realty, which offers a historically high 4.5% yield. In fact, the last time the yield was this high was during the 2008-09 recession. That brings up the not-so-pleasant issue of the U.S. recession that started in February 2020. This downturn was precipitated by the economic shutdowns used to slow the spread of the coronavirus. And in the retail sector, the coronavirus effectively sped up the previously slow-moving retail apocalypse that was already hitting this REIT niche. 

With non-essential businesses forcibly shut down, Federal Realty has had trouble collecting all of the rents it is due. In fact, in the third quarter, it was still only getting 85% of its rent roll even after restrictions were eased. Even though that's a worryingly low number, it is a big improvement from the levels it suffered through in the early days of the pandemic. Although the company raised its dividend again in October, that was meant as a show of its commitment to investors. The REIT's funds from operations (FFO), which is like earnings for an industrial concern, payout ratio was a very worrying 95% in the third quarter. 

FRT Chart

FRT data by YCharts

Times definitely remain tough, and there's not a lot of room for adversity here, but management doesn't think the pain is over yet. Isn't that comforting? Indeed, during Federal Realty's third-quarter 2020 earnings conference call the CFO specifically stated that occupancy is likely to fall from the low-90% area to the mid-to-high-80% space before the current downturn is over.

That's not great news, but there are signs of hope. The real estate business is all about location, location, location, as the old industry saying goes. And Federal Realty owns very well-located assets. In fact, during the third-quarter call management noted that it was fielding inquiries from potential tenants with nearby locations run by other landlords. In other words, tenants are looking to upgrade to better locations, and they believe Federal Realty's properties are those location -- even if it means paying higher rents. That suggests that the real issue right now is working out the weaker existing tenants so that Federal Realty can upgrade its tenant list. Shifts like this don't happen overnight for most retail REITs, so it's a process. But the fact that Federal Realty is already seeing progress is a very positive development.

The big picture

When you step back and look at the whole story, Federal Realty looks like it is on sale for a reason. But given its long and successful history, even conservative dividend investors should still be interested in this REIT. A key reason for that is the fact that Federal Realty is already starting to use this downturn to upgrade its tenant list. Yes, there are likely to be tough days ahead in the near term, but if history is any guide that appears likely to set this REIT up for longer-term success. If you act now, you can pick Federal Realty up while others are still downbeat on this successful retail REIT.