Federal Realty (FRT -0.93%) owns a fairly small portfolio of strip malls and mixed-use developments. Although it isn't the biggest name in its sector by any stretch of the imagination, it does have something that no other real estate investment trust (REIT) can offer: the longest streak of annual dividend hikes of any publicly traded REIT. Here's why I came to own Federal Realty and why I'm not planning on giving it up anytime soon.
It was the best of times it, was the worst of times
Pardon the Charles Dickens quote there, but when I look back at 2020, it really was a year filled with dichotomies. For example, I had previously bought Tanger Factory Outlet Centers (SKT -0.19%) believing that the retail apocalypse story was real but vastly overdone. Yes, online shopping is becoming increasingly important, and some predominantly physical retailers have fallen by the wayside. But humans are social animals, and shopping is one of the ways we get together in groups. Given Tanger's long history of success in the outlet-center space, I was confident it would not only survive but also thrive. I also owned Simon Property Group (SPG -0.45%) for similar reasons, but it is a much more diversified mall REIT.
When the pandemic got underway and malls were slammed by government mandated closures, Tanger and Simon both sold off hard. I had some capital gains from another investment that I wanted to offset, so I harvested some tax losses by selling both. But all retail-related REITs sold off hard, and as I was looking to get back into the sector, I decided to shift things up a little bit. Given Simon's diversification (it owns both outlet centers and enclosed malls), I repurchased it after the applicable 30-day wait to avoid the wash-sale rule. And, instead of buying Tanger again, I added some diversification to my portfolio by purchasing Federal Realty at what seemed like a pretty desirable price. Basically, despite the losses I took, I used the early 2020 downturn to expand my retail reach beyond malls to include shopping centers and mixed-use developments. That's a net win from a portfolio diversification standpoint.
Why Federal Realty
I would be lying if I didn't admit that my first attraction to Federal Realty was the dividend. But the yield, which had spiked because of the price downturn, wasn't the real draw. The draw was the REIT's over-five-decade-long streak of annual dividend increases. In fact, it claims to have the longest streak of any REIT, and I've no reason to disbelieve it. Even during the worst of the 2020 downturn, when rent-collection rates were weak, management stood by the dividend, too. Management specifically explained that it believes it owns great assets and that the storm would eventually pass. When that happened, it would re-tenant its properties and everything would be, basically, back to normal. Given that the last 50 years has included an incredible number of economic dislocations, it was hard not to be drawn to management's calm appraisal of the situation.
The one troubling thing about Federal Realty, however, is the size of its portfolio, which is only a touch over 100 properties. Peers in the space often have several hundred assets, which would make them a better diversification play. Only Federal Realty hasn't managed to increase its dividend for as long as it has by fumbling about; it knows what it's doing. It's probably best to think of it as a value over volume acquirer of property, with a finely honed portfolio located in the most desirable areas (think lots of wealth and significant population sizes). While I generally prefer diversification, given the REIT's strong history I am comfortable with this trade-off. Also, looking at the long-term e-commerce issues, I think being selective could be an increasingly important approach.
While I used the downturn to add Federal Realty to my portfolio, the REIT also made good use of the time period, adding a handful of assets at what it believed were cheap prices. Clearly, given my opportunistic investment decision, that move sits well with me. And it speaks to a long-term positive. Federal Realty is an active portfolio manager, buying and selling assets. When it adds new properties it looks for great locations and an opportunity for value enhancement via redevelopment. Once it has maximized the value of a property and gets a good-enough offer, it is willing to sell in order to fund future acquisitions. That means it is always looking for a way to build shareholder value and, as such, should be a great long-term holding and not just a short-term rebound play.
At the end of the day, my retail REIT theme got slammed in early 2020. I chose to make some moves, including shifting out of Tanger and into Federal Realty. It proved to be a timely change because Federal Realty's yield was high at the time, but the real attraction here is the long-term approach that has rewarded dividend investors with annual hikes for decades. Now that this REIT is in my portfolio, I have no plans to sell it. Essentially, I got lucky during the 2020 downturn and added what I think is one of the best strip mall REITs around. I'm happy to ride that lucky call right through my retirement years.