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This REIT Has Cracked the Code to Creating Value Out of Land

By Reuben Gregg Brewer – Dec 22, 2021 at 11:44AM

Key Points

  • Federal Realty pays a lot of attention to the location and quality of its properties.
  • Federal Realty doesn't ignore price, making sure it gets a good deal so its future options are always open.

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Federal Realty's portfolio is all about location, location, location... but there's another important factor that investors shouldn't ignore.

There are so many factors to examine when making investments that you can't possibly look at them all. You need to focus your efforts on a few, often simple, things so you can cut through the noise and make a decision. Real estate investment trust (REIT) Federal Realty (FRT) has figured out two key factors for its property portfolio. Here they are and here's what you can learn from them.

1. Location, location, location

One of the most interesting things about Federal Realty's portfolio is how small it is, containing just 106 properties. Compare that to shopping center peers like Regency Centers (REG 2.91%) and Kimco (KIM 2.86%) which own 402 and 545, respectively. And yet, despite a portfolio that's roughly a quarter to a fifth the size of these two REITs, Federal Realty's market cap is $10 billion compared to $12 billion for Regency and $14 billion for Kimco.

A hand drawing a price versus value graphic and a bullseye on the low price high value quadrant.

Image source: Getty Images.

Why is such a small portfolio so close in value to peers with larger asset collections? It's because Federal Realty is very selective with what it buys, ensuring that its properties are located in population-dense regions with a lot of wealth. That's a key focus for all three of these names, but Federal Realty is simply extra selective. That comes out when you take a look at the rent each of these REITs brings in the door. In the third quarter of 2021, Federal Realty's rent roll totaled $247 million, or, using back-of-the envelope math, $2.3 million per property.

That same math for Regency isn't nearly as attractive. This REIT's rents in the third quarter totaled $283 million, or just over $700,000 per property. The same trend holds true for Kimco, with just under $365 million in rent, or roughly $670,000 per property. Clearly, Federal Realty has much more productive assets. The bigger-picture takeaway for investors here is to focus on the best investments.

2. Optionality

However, owning great locations isn't the only story. Federal Realty also wants to make sure it gets a good deal. Notably, it bought a handful of assets during the pandemic downturn. But the key to this was probably summed up best by CEO Don Wood during Federal Realty's third-quarter 2021 earnings conference call:

At the end of the day, what you get in at, will help determine what it is that you can make work, in terms [of] highest and best use. And so, when you look at something like Grossmont, price per acre is really important to us because we're not sure of exactly which way we can go. But because of a price we've got in it, we've got multiple ways to go. And that's when you really think about creating value it really often comes down to the flexibility.

He added later, "That going in price is probably the most important factor in determining what it is that you can do." Basically, buying top-notch locations at the right price allows Federal Realty to position, or reposition if necessary, a piece of property to generate the highest possible returns. This is notable because a core piece of the company's business is redevelopment, so it is always putting more cash to work at the properties it owns. 

The bigger takeaway here is that value matters, but buying at a modest price is also vital for long-term returns. In the stock market, that would translate to getting a good deal on a great company, allowing you to stick out the tough times as your investments work though inevitable business downturns to come out stronger on the other side.

You've heard this before

To be fair, buying great assets at good prices isn't exactly new; investment legend Warren Buffett has been espousing these ideas for years. However, Federal Realty shows that there are nearly universal concepts that are important to apply when investing and when running a business, at least one that buys a portfolio of properties like Federal Realty. You might want to keep that in mind the next time you look at buying a stock and, more specifically, when you dig into REITs.

Reuben Gregg Brewer owns Federal Realty Inv. Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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