Real estate investment trusts (REITs) make money by charging tenants rent, so this is an important metric to monitor. However, different property types have different rent dynamics. Which is why it's so interesting that retail-focused Federal Realty Investment Trust (FRT 1.53%) is highlighting the success of a new apartment building in one of its mixed-use projects. Here's what you need to know.
A great history
Federal Realty's biggest claim to fame is that it has increased its dividend annually for longer than any other REIT. Its streak is actually pretty incredible, at more than 50 years. That makes it a Dividend King -- the only REIT to have achieved that feat. With that kind of track record, investors should probably be paying close attention to what management says. Indeed, you don't build a dividend streak like this one without doing a lot of things well.
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The core of Federal Realty's portfolio is its strip malls and power centers, which together account for about 60% of its rents. These generally have grocery stores as anchor tenants and draw customers on a consistent basis. The company is something of a sharpshooter, though, with only about 100 properties. Unlike peers that own three times as many properties, or more, Federal Realty's centers are highly targeted in just nine core markets.
Basically, Federal Realty is looking to be in the best locations in the best markets. Think high average personal net worth and a large population and you'll understand exactly what management is looking for when it buys. It's also particularly fond of markets where building new supply is difficult -- which dovetails well with the logic Federal Realty uses for its mixed-use developments.
Similar model, similar results
Federal Realty's mixed-use properties, which make up about 36% of its portfolio, are interesting. These are multistage development projects that get completed over time, offering built-in growth opportunities. Given the long-term nature of these developments, location here matters even more than for the REIT's strip-mall assets. And given that mixed use includes retail, office, and residential property types, adding some diversification to the REIT's portfolio, these are fairly complex endeavors.
One particular project offers significant insight into the company's apartment development efforts. Assembly Row, located outside of Boston, opened a new 500-unit apartment building in 2018. The property was largely filled up before the coronavirus pandemic, between 2018 and 2019. Literally next door to this building, Federal Realty just opened another 500-unit apartment building, and the rents it is getting are 15% higher. For all intents and purposes, these are virtually identical buildings.
That said, these are in the hot Boston market. The story from the pandemic was that people were leaving the big cities and not looking to go back, thanks to the increased ability to work remotely. And yet demand has clearly been robust at Assembly Row, given the sizable rent rate increases for Federal Realty's new development. Moreover, demographics in the area are skewed toward younger adults/families with high educations and sizable salaries. Basically, the people who want to live in Assembly Row are the same type of people who have always wanted to live in and around urban centers. Despite the pandemic, Federal Realty's newly opened apartment shows things haven't changed as much as many predicted for big-city apartments.
One piece of a bigger puzzle
For Federal Realty investors, the rent rates at Assembly Row present an interesting piece of information that shows that the REIT continues to execute well. Yes, it's good news, but this is just one small part of a much larger development, which itself is part of a larger REIT. From a broader perspective, however, the strength of these two sister properties shows that cities remain a powerful draw. And that, importantly, remains true even after a global pandemic, offering a potentially positive outlook for everything from urban apartments to offices to retail.
