Federal Realty (FRT 1.70%) raised its dividend for the 55th consecutive year when it reported second-quarter earnings in early August. That not only makes this real estate investment trust (REIT) a Dividend King, but it extends the longest dividend streak of increases in the REIT sector. With a yield of about 3.8%, this conservative landlord could be a solid cornerstone for your portfolio.
Some pretty strong numbers
Behind this Dividend King's dividend record is a pretty impressive business. The REIT owns roughly 100 properties, which is fairly modest compared with other landlords in the strip mall sector. However, it focuses on being in and around major metropolitan areas with high barriers to entry. On average, there are 172,000 people living within a three-mile radius of its properties, and the average household income is an impressive $133,000. Retailers like to be located in areas where people can afford to shop in both good economic periods and bad ones, and Federal Realty delivers that.
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About a third of the company's rent roll comes from mixed-use developments in major markets like Washington D.C., Boston, and California. These properties include offices, retail, and apartments. Although being in high-barrier-to-entry regions is a major plus, the key for investors here is that mixed-use projects get built in stages over many years. Thus, Federal Realty has material internal growth within its portfolio.
That actually plays into a strength, as well, because not only does the REIT own good strip malls, but it also has a long history of investing in them. In fact, it often buys properties that need a little love, promoting higher rents and occupancy over time. So it has ample development and redevelopment experience. Notably, though, once a strip mall has achieved management's targets, it will sell it (for the right price), so it can reinvest the proceeds in a new property where it can spend years investing in growth.
That's the basic model, and it has been a very good one, judging by the incredible dividend track record.
What has Federal Realty done lately
The early days of the coronavirus pandemic were tough on Federal Realty since many retail stores were closed and its lessees were struggling. But that was a long time ago at this point, and the company's second-quarter 2022 results suggest that the REIT is doing quite well today. For example, Federal Realty's occupancy was 92%, up 2.4 percentage points versus a year ago. Small-store occupancy, which tends to be more volatile than larger anchor leases, was up to 89.3%, a 3.6-percentage-point increase over the prior year and up 5.8 percentage points from the pandemic low. Business is clearly coming back strongly.
The company signed 137 leases in the quarter, which is the most in the company's history, according to management. Those leases, meanwhile, aren't at fire-sale prices, with the average rent bump over the expiring lease coming in at about 5%. That shows the strong demand that exists today as the pandemic moves further and further into the rearview mirror.
This backdrop led management to increase its 2022 outlook for funds from operations (FFO), which are a critical metric for gauging a REIT's performance. Management upped the call from a range of between $5.85 and $6.05 to a range of $6.10 to $6.25. The company has a history of being conservative with its forecasts, so there's a very good chance that it will hit the new range.
The problem with this great REIT
So far, Federal Realty sounds like a pretty strong investment, and it is. But the most recent dividend hike was a tiny penny per share, or just under 1%. That follows along with the recent trends here, so investors are basically buying a reliable dividend payer (the FFO payout ratio in the second quarter was a very solid 66% or so) and not a high-growth dividend stock. The yield is also not particularly generous, historically speaking, or relative to other REITs.
However, for conservative investors looking for a portfolio cornerstone, one where you can collect a quarterly check in good markets and bad, Federal Realty is still a worthwhile choice. That said, if a recession pushed the stock down and the yield up to the 5% range, like what happened during the 2020 pandemic-driven economic downturn, this leading dividend-paying REIT would probably be worth adding to just about any portfolio.
