Federal Realty (FRT) shares are near their highest levels of the year, having gained a huge 38% in a little over six months. That's around twice the gain of the S&P 500 Index and 18 percentage points better than the average real estate investment trust (REIT), using the Vanguard Real Estate Index ETF as a proxy. Is this high-flying REIT worth buying?

A little perspective

Federal Realty's shares have, indeed, had a good run in 2021, but they are still 30% below the high water mark set in 2016. The reason why, on both fronts, is basically the same. This real estate investment trust owns retail properties. That was a terrible place to be in pandemic-hit 2020 when the government forced non-essential businesses to close and asked people to avoid each other in an effort to slow the spread of the novel coronavirus. The drop since 2016, meanwhile, has been driven by fears of the retail apocalypse, which is being vastly overblown. Yes, financially weak retailers that haven't kept up with customer trends (including, but not limited to, online shopping) are going bankrupt and/or closing stores. But people continue to shop in physical stores, and good retail locations that draw repeat customers are hard to replace.

Two people looking at a computer with a stock graph on the screen.

Image source: Getty Images.

Notably, during the worst of 2020, Federal Realty was fielding calls from retailers with nearby locations that wanted to move into one of its roughly 100 largely grocery-anchored properties. The why here is pretty simple, Federal Realty owns some of the best-positioned shopping centers in the country (effectively that means they are located in rich and populous regions) and store closures during the pandemic created a unique opportunity for still-strong retailers to get into better strip malls and power centers. Sure, leasing activity dropped sharply in the first half of 2020, dipping to just 50 leases signed in the second quarter, but by the third quarter the numbers had doubled from that nadir. And the leasing strength flowed over into 2021's first quarter, as well. 

In other words, this retail REIT is doing quite well despite the pandemic hit. Note, too, that it increased its dividend in 2020, adding another year to its over 50-year streak of annual increases (making it an elite Dividend King).

Is now the time?

Federal Realty is rarely cheap, so investors shouldn't go in thinking they are getting a bargain here. However, the yield remains at the higher end of its historical range over the past decade. So it would be hard to call it cheap, which was the case in 2020 when the yield spiked to over 6% at one point; but the roughly 3.6% dividend yield is probably a fair entry point for long-term investors that prioritize consistent dividends over high yields. 

FRT Chart

FRT data by YCharts

Adding to the allure is that Federal Realty is already laying out its 2021 and 2022 expectations as it works to get its portfolio back on track. In 2020 funds from operations came in at $4.38 per share. In 2021 the REIT expects to get to between $4.54 and $4.70 per share. And in 2022 it is projecting a range of $5.05 to $5.25 per share. In other words, unless something really bad happens again, there is material growth ahead for Federal Realty as it bounces back from the pandemic hit.

But it's not just focusing on a recovery, the REIT is actively working to grow its business. To that end, it bought four shopping centers in the first half of the year, each presenting unique growth opportunities from simply re-tenanting all the way to building on vacant land. Notably, the REIT has entered a new market (Phoenix, Arizona), expanding its reach into an area that is expected to see notable population growth in the years ahead.

These deals were announced after the 2021 and 2022 guidance were provided and could enhance those numbers, assuming things work out as planned. In other words, the future looks pretty bright.

Buy and hold

Paying a fair price for a great company isn't a bad decision. And that seems to be exactly what's going on with Federal Realty today, despite the huge price gains so far in 2021. Indeed, Federal Realty is sticking to its playbook of owning a small number of great properties in highly desirable regions so it can reward investors with reliable dividends. That's a mouthful, but given the historical success of that approach, it's hard to argue with what's going on today. And given that the stock is still 30% below its 2016 peak, well, it might not be quite as expensive as you'd think.