After a long period of rising interest rates, it looks like the economy might be slowing down. If the U.S. enters a recession, it pays to look at companies that are somewhat defensive and have a long record of performing in difficult economic environments. Federal Realty Trust (FRT -0.37%) is a real estate investment trust (REIT) with a long history of operations and dividend hikes. Is the stock a buy?
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A highly diversified portfolio of businesses in top markets
Federal Realty Trust manages and develops retail and mixed-use properties in the Northeast and Mid-Atlantic U.S., California, and South Florida. As of June 30, 2022, Federal Realty Trust owned 102 properties with 26 million square feet. The company had approximately 3,300 tenants and 3,100 residential units. Federal Realty's buildings include retail, office, residential, and hotels. The company was established in 1962 and has a long track record of dividend increases.
Federal Realty Trust's top tenants include TJX Companies, which is the parent company of retailers TJ Maxx and Marshalls, Dutch supermarket giant Ahold Delhaize, NetApp, Splunk, and CVS. None of these companies account for more than 2.8% of annual rent.
Federal Realty Trust operates in the first-ring suburbs of nine major U.S. metropolitan markets, including Silicon Valley, Southern California, Phoenix, Chicago, Washington DC, Philadelphia, New York City, and Boston. These areas are characterized by high population density, high incomes, and high barriers to entry. Approximately 38% of operating income comes from mixed-use/urban formats, 27% from super-regional centers, and 21% from grocer-anchored centers.
Grocery is an important component, with approximately 78% of Federal Realty Trust's properties having a grocery. By industry, 10% of Federal Realty Trust's tenants are grocery/drug stores, 8% are limited-service restaurants, and 8% are full-service restaurants.
Federal Realty Trust's tenant base is defensive
Federal Realty Trust's tenant base is generally pretty defensive, which means it will hold up better in a recession than companies that are more cyclical. The company is one of the oldest REITs in the U.S., and has grown funds from operations (FFO) at a much faster pace than its peers since 2005. REITs generally use funds from operations as a supplemental measure of income, in addition to net income as reported under generally accepted accounting principles (GAAP).
This is because depreciation and amortization (D&A) is a massive expense for real estate companies. However, it is a non-cash charge. This means that net income as reported under GAAP tends to understate the company's cash flows. For this reason, it is generally a better idea to look at the company's price per FFO per share, instead of the price-to-earnings (P/E) ratio.
Great company, but there may be better options out there
Federal Realty Trust reported that the second quarter was better than Wall Street expectations, with FFO per share rising to $1.67 from $1.65 a year ago. Occupancy increased to 92.8% from 92% a year ago, and the leased percentage rose 20 basis points year over year to 94.3%. Federal Realty Trust increased its dividend during the quarter, and bumped up guidance for 2023. It now forecasts 2023 FFO per share to come in between $6.46 and $6.58. At current levels, this gives the company a price-to-FFO ratio of 15 times, which is a reasonable multiple for a high-quality REIT.
Federal Realty Trust has a dividend yield of 4.5%, which is nothing special, given where interest rates are. It's trading at a similar multiple to REITs like Realty Income (O -0.17%), but the triple-net lease giant Realty Income has a better dividend yield. Federal Realty Trust is a well-run, high-quality company, but there may be better-yielding opportunities out there.
