Federal Realty (FRT -0.37%) isn't your typical strip mall real estate investment trust (REIT). One of the first places to see that is in its dividend, which has been increased for over five decades and lands the company on the Dividend Kings list. In fact, it's the only REIT on that list. But from a more granular level, development and redevelopment is another important effort that distinguishes this REIT from its peers.
A small but well-situated portfolio
Very often REITs focus on buying properties as they look to grow their businesses. There's nothing inherently wrong with that approach, but over time portfolios can get unwieldy. Federal Realty takes the opposite track -- it only owns around 100 properties. But it is highly specific about where and what it will buy.
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That shows up in the average population that lives near its buildings. The mix of wealth and population density is better than any of its close peers, meaning Federal Realty owns assets in areas where retailers want to be located.
Don't underestimate the value of this. During the pandemic, when retailers were shutting down stores, Federal Realty was fielding incoming calls from retailers for the space that was opening up in the REIT's portfolio. Many of those retailers had locations nearby, but wanted to upgrade to a better location. All in, the company is focused on just nine regional markets, largely near important cities.
Being laser focused on top-notch locations is the first way Federal Realty adds value for shareholders. The second way is by putting in the time and effort to make the properties it does own more valuable.
Always looking for an angle
From a simplistic point of view, a rental property is worth some multiple of the rent it generates. But for a company like Federal Realty, that's just a starting point. This is because management is looking for properties to which it can add value. Some of that value comes simply from being a part of Federal Realty. But more comes from the REIT's proven ability to make properties more attractive through investment.
The Friendship Center in Washington, D.C. is a recent example. Today this property is all retail in an area where that product type isn't as attractive as it once was. Housing in the area, however, is a bit scarce. So, Federal Realty sat down and created plans to build a 12-story apartment building (containing 310 apartments) with retail on the ground floor and parking underground. Simply put, it's taking a relatively small asset that's losing tenants and turning it into a property that will supply the area it serves with more of what it needs.
This is not the only project the company has on the drawing board. It's either working on or has entitlements to build around 3,500 apartment units at existing assets. If it has an entitlement, the project is basically shovel-ready, whenever Federal Realty feels it makes sense to begin. Or, if it chooses to sell an asset, the preexisting right to build apartments effectively makes the property more valuable to the buyer, increasing the price of the sale.
Development and redevelopment come with risks, of course. Historically, Federal Realty has proven very good at controlling the things it can control (like coming in on time and on budget). But commodity and labor costs are a wildcard today that's making such investment a little harder to justify. So the REIT isn't likely to start construction on all of those apartment units right away, but they do provide a built-in pipeline for growth... when the time is right.
Not your ordinary strip mall landlord
Federal Realty truly does things differently, from its modestly sized portfolio through to its development and redevelopment efforts. The interesting thing, however, is that both of those facts speak to a team that's highly focused on making the most out of every investment it makes. Given its long-term success (remember, it's a Dividend King), conservative investors might want to take a deep dive into this REIT and its reliable 4.2% dividend yield.
