One of the biggest takeaways when you dig into Federal Realty Investment Trust (FRT) is that this real estate investment trust (REIT) is highly focused. Its playbook has been honed over decades, proving incredibly successful and resilient. I bought the stock in 2020, while it was deeply out of favor, and I would view a market pullback from here as a chance to buy more. Here's why.
Doing a few things very well
I used the term "focused" to describe Federal Realty, and it fits. First off, the company is structured as a real estate investment trust, meaning it owns a collection of income-producing properties for the express purpose of passing income on to shareholders. It is keyed in to the retail sector, with a collection of strip malls and mixed-use, retail-focused developments. It only owns around 100 properties, which is pretty small for a strip mall REIT with more than 50 years of history behind it, but the properties it owns are located in wealthy and population-dense regions.
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Sticking to a small collection of great properties and maintaining them at high levels has been a winning combination over time. To put a number on that, Federal Realty has increased its dividend annually for 53 consecutive years. That not only makes it a Dividend Aristocrat, which means 25 years of dividend increases, but an even more rare Dividend King, meaning an incredible five decades of increases.
As you might guess, Federal Realty doesn't go on sale very often. However, there was an opportunity to jump in when retail landlords were struggling to collect the rent they were owed during the early days of the coronavirus pandemic in 2020. That's when I bought the stock, with the intention of holding it for a very long time.
The next downturn
At recent prices, the stock is up around 40% over the past year, so it has rebounded nicely from the depths of the 2020 bear market. That said, it is still around 40% below its 2016 highs, and 20% lower than its late-2019 highs.
There are reasons for this. For one thing, Federal Realty is still dealing with the long-term shift toward online shopping. Since most of its locations have grocery stores in them to draw foot traffic and ample service businesses that can't easily be replaced digitally, however, it should be able to navigate this issue.
Meanwhile, it is seeing strong demand from retailers looking to upgrade their locations from nearby properties. So while vacancy is elevated right now thanks to the pandemic, and will likely dip to the high-80% range in the first half of 2021, management expects an upturn in the back half of the year. And that hints at a much brighter future, with a much stronger tenant roster.
That's the key takeaway here: Federal Realty is getting stronger during this downturn. So when the next market downturn does hit, it will be going into it with an even better-positioned portfolio. Given that the REIT muddled through the pandemic-hit 2020 in stride, adding yet another year to its dividend increase streak, the next downturn should be even easier to live through as the REIT adds better tenants to its roster. That means that any widespread sell-off should probably be viewed as a chance to buy more shares of this Dividend King, not a reason to cut and run. Or, if you don't own the stock today, a broad market decline could be a second chance to get into a great name for the first time.
Slow and steady
Federal Realty is a well-run REIT with a slow and steady history of rewarding investors with dividend increases over time. The yield, at 4.2%, isn't huge (though it's well more than double what you'd get from an S&P 500 Index fund), but that's because of the quality of its portfolio and the consistency of its business over time. Should the stock plunge along with the market, my first reaction will be to do absolutely nothing, reinvesting the dividends.
But as I watch the stock drop, I'll be thinking about adding a few more shares to my position, since buying more of a great company when investors are fearful is exactly the type of thing that gets me excited. In fact, you might even say I'm patiently awaiting a downturn, which I know full well will eventually provide me the opportunity to buy more Federal Realty.
