Federal Realty (FRT 0.01%) has increased its dividend for more than 50 consecutive years, a feat unmatched by any other real estate investment trust (REIT). It hasn't achieved this incredible record by accident, and the 2020 pandemic shows the resilience of its portfolio of strip malls and mixed-use developments. Today, however, the most important factor to watch is probably Federal Realty's small stores. Here's why.
It was a tough period
Retail properties across the board were hit hard by the pandemic, as people practiced social distancing, working from home became widespread, and nonessential businesses were shuttered by the government. Federal Realty continued to increase its dividend, by a token amount, despite the headwinds, maintaining its status as a Dividend King. During Federal Realty's second-quarter 2020 earnings conference call, Chief Executive Officer Donald Wood said, "This company has effectively been built to be able to provide an equity investor a return that comes from appreciation as well as a dividend."
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But the decision on the dividend was much deeper than just an attempt to keep an impressive annual streak alive. The company has a deep conviction that it owns some of the best properties in its markets. Notably, the portfolio, which is rather small at just about 100 assets, is about a third the size, or even smaller, of its closest peers. Federal Realty's goal is quality over quantity.
That has clearly served the REIT well over time, looking at the dividend. But it's worthwhile to look at what's happening under the covers here to see just how well its portfolio is rebounding.
Building on a solid foundation
The core of any shopping center REIT is its large tenants. These anchors are what draw customers to the properties, and they are usually the most resilient lessees, given their size and the sectors in which they operate. Notably, about 75% of Federal Realty's centers have a grocery store in them. Such anchor tenants take up about 57% of the company's leasable space and account for 39% of its rents. The company's office and residential properties, which are contained in its mixed-use developments, make up roughly 22% of rents. The rest, 39%, is tied to smaller retail tenants.
Small tenants tend to be the most sensitive to economic conditions, and about 10% of Federal Realty's rents come from local mom-and-pop tenants. This is why it is so exciting to see that small-shop occupancy increased 130 basis points between the third and fourth quarters of 2021. The REIT's total occupancy only went up 80 basis points, so the big driver here is the rebound in these economically sensitive small shops. Looking back to 2020's fourth quarter, small-shop occupancy levels increased 280 basis points year over year.
Management believes there's more room for improvement as well. Current small-shop occupancy is about 87.4%, but the company thinks it can get that up to 90%. Assuming that the economic recovery continues, there's no reason to doubt Federal Realty can reach that figure, given the highly focused portfolio that is basically located in some of the largest and most attractive U.S. markets.
The full picture
At the end of the day, Federal Realty's smaller shops are important, but they aren't the REIT's foundation. Still, when times get tough, small shops are the most likely to suffer. And when conditions are improving, the small shops are the ones that will power the company's rebound. That's exactly what's taking shape today at this Dividend King REIT. Investors should be pleased with the improvements so far and continue to watch the small shops as they monitor Federal Realty's rebound.
