Federal Realty's (FRT) stock was down around 50% in the early days of the pandemic in 2020. Rent collection concerns amid the fast-spreading illness outweighed just about anything else investors knew about this real estate investment trust (REIT). As 2021 has gotten under way, however, Federal Realty has bounced back strong. And the future looks increasingly bright as well.
What an upturn
Toward the end of 2020, even as non-essential businesses were being allowed to reopen after government-mandated shutdowns, Federal Realty was taking a cautious approach with guidance. It was looking for the first half of 2021 to be an occupancy low point, with this key metric falling, perhaps, into the mid 80% range. When the strip mall REIT's first-quarter numbers were in, occupancy stood at 89.4%. The second-quarter number was 89.3%. By the third quarter, however, that figure was back to 90%.
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At first blush, the company's early guidance was directionally in line with the trend. However, during Federal Realty's first-quarter earnings call, CFO Dan Guglielmone noted that occupancy levels were coming in at "...stronger levels than we predicted to start the year." In the second-quarter earnings call, he noted that occupancy was "roughly 50 to 100 basis points better than we had expected." And in the third-quarter call, the CFO highlighted that while occupancy was 90.2%, it had leases signed for another 2.6 percentage points of space. So occupancy had clearly turned the corner and, Guglielmone noted, could get back to the 95% peak of just a few years ago.
CEO Don Wood, however, was even more optimistic, explaining in the third-quarter call:
At quarter's end, our portfolio was 92.8% leased, and 90.2% occupied. Both improvements over last quarter, and the quarter before that. But a long way from being 95% leased, which we were just 3 years ago. The earnings upside from not only getting rent started in all the leasing we've done to date, but the continuation of occupancy gains to historic levels and maybe higher over the next couple of years, provides a visible and low-risk window as a strong future growth.
The future is bright
To be fair, Federal Realty has been calling for a notable upturn in 2022 basically since the downturn in 2020. It owns a small collection of very desirable properties, and it was always confident that they would bounce back. So confident, in fact, that it raised the dividend in 2020 despite the pandemic headwinds. But in the third quarter this year, management actually increased its funds from operations (FFO) guidance for 2022, taking it from a range of $5.30 to $5.50 per share to a range of $5.65 to $5.85. The FFO range for 2021 is expected to be between $5.45 and $5.50 per share, so that's a 6% advance at the high end, which is pretty solid for a REIT.
But there's more good news to come. When talking about the updated guidance for 2022, CEO Wood also added, a bit off the cuff, "And while maybe premature, preliminary targets from our model show FFO growth in 2023, and 2024 in the 5% to 10% range."
That's likely to be driven by ongoing strong occupancy trends, but there's more here than that. During the downturn, Federal Realty started to look for acquisitions that fit in with its focused approach. It found a handful of properties, including some in Arizona, which is a new market for the REIT. Management has hinted strongly that the prices it paid are likely much better than what it would have been able to get in the current market, as strong demand for grocery-anchored strip malls has pushed prices notably higher for such properties this year.
In the second-quarter conference call, for example, CEO Wood noted, "We frankly have plenty to do on the existing ones that we have. And when you look at the acquisition trade-off, if you will, versus development, I think there was a window. And I think we jumped through that window during COVID, where that difference was really attractive and pointed you toward acquisitions."
But in that statement is another really big highlight. One of the big growth drivers for Federal Realty is redevelopment of properties to make them more productive. Add in the new properties bought at opportunistic prices and this REIT now has even more upside potential in the years ahead. The new properties are still, well, fairly new to Federal Realty, so it probably hasn't been able to do much with them yet. However, as it gets a better handle on owning them, it will be nice to hear what it has planned when it holds its fourth-quarter 2021 earnings call.
Rolling out the next year
I bought this REIT in 2020 during the dark days of the pandemic believing it was well run and resilient. So far I haven't been let down. I already know that 2021 is going to be a pretty good year, given the 2020 backdrop, and that 2022 is expected to be even better still. But with management already hinting about 2023 and 2024, I'm really looking forward to hearing more about the company's expectations for those years. Basically, I'll be stoked to hear any update provided to those out years when Federal Realty reports fourth-quarter results in early 2022. I'm expecting very good things.
