I had admired Federal Realty Investment Trust's (FRT) success from afar for a very long time. In 2020, amid the confusion and concerns of the coronavirus, Wall Street gave me an opportunity to buy it with a historically generous dividend yield. And now I'm holding for the long term, even if the stock market crashes again. Here's why I have no plans to sell Federal Realty anytime soon.
1. How long?
Real estate investment trusts (REITs) like Federal Realty are specifically designed to pass income on to investors. So a REIT's dividend track record is one of its most important indicators of success.
Ten years of annual increases (Dividend Achiever status) is a pretty good indication that a REIT is doing something right. Twenty-five years (Dividend Aristocrat level) is like a gold star, highlighting a REIT that has stood the test of time. Federal Realty's 53 consecutive years of annual dividend hikes puts it into an elite category that few can match, often called Dividend Kings. In fact, Federal Realty believes it owns the longest record of annual dividend increases of any publicly traded REIT.
Notably, Federal Realty increased its dividend in 2020, despite the impact of the coronavirus on its retail-property-focused portfolio (more on this below). Many of its closest peers either held the line or cut their dividends. The admittedly token dividend hike was a statement from the REIT that it fully understood its shareholders were looking for a reliable and growing income stream. And, perhaps more important, that even during the most difficult of times, Federal Realty has the financial strength to provide what investors want.
2. The best of the best
One of the most interesting things about Federal Realty is that its portfolio is actually fairly small compared to its peers. Indeed, it only owns around 100 shopping center and mixed-use developments, while its peers often have multiples of that. The difference is that Federal Realty focuses on quality over quantity, with a keen focus on owning properties in densely populated markets with high average incomes. Moreover, it invests in its assets to keep them desirable. A good sign of this was during the pandemic, when retailers with nearby locations were reaching out to Federal Realty about the possibility of moving into its centers so they could upgrade to a better location.
A more number-centric approach to the quality here is to look at the rents that Federal Realty is able to charge. In the first quarter of 2021, on a comparable basis, the REIT inked leases for roughly 500,000 square feet of space. It was able to charge $36.58 per square foot, up roughly 9% from the average contractual rent of $33.64 per square foot for the last year of the prior leases. That's pretty impressive given that the U.S. is only just now starting to broadly reopen after months of pandemic-driven lockdowns.
3. Nothing is perfect
Although Federal Realty has done an excellent job of navigating rough periods, that doesn't mean it is immune to hardship. The pandemic pushed its rent collection rates down to troubling levels in 2020, noting that in April only around half of its tenants paid what they owed. Moreover, the pandemic has left Federal Realty's occupancy at historically weak levels. Management expects occupancy to fall into the high 80% area before starting to rebound in the second half of 2021.
The thing is, these hardships only help to prove the REIT's long-term desirability. Indeed, despite facing difficulties, it has been able to lean on its investment-grade rated balance sheet to muddle through in the short term. That gives it time for the quality of its portfolio to attract new, likely more desirable, tenants so it can keep rewarding investors over the long term.
All of this helps explain why I bought the stock during the bear market in 2020 despite the pandemic and its impact. I fully expected this industry leader to come out the other side of this awful period an even stronger competitor than when it entered it.
I'll keep holding on
At this point, the worst of the coronavirus storm appears to be over, and Federal Realty can start looking to the future. In fact, the REIT expected things to be worse than they have been, so the recovery so far is even better than it was hoping. At recent prices, the REIT's yield was a miserly 3.6%, so I'm not as excited about the stock today. But I sure won't be selling it, and should the shares fall anew, I would likely consider adding to my position. In other words, this is a name that conservative income investors should probably keep on their wish lists just in case another opportunity to buy shows up.