At its current share price, Federal Realty Investment Trust (FRT -0.37%) is offering investors a 4.6% dividend yield. You could probably get a better yield with a CD from your bank. But what you'd miss out on is the opportunity for dividend growth. This mall and mixed-use landlord is the only real estate investment trust (REIT) on the Dividend Kings list. But there's more to the story here that helps explain why you can count on Federal Realty to keep paying you for years and years.
Federal Realty focuses on the basics
Federal Realty owns malls and mixed-use developments, a segment of the REIT sector with a fair number of significant competitors. The big difference between this company and its peers is that it only owns around 100 properties while others in the space own hundreds. There's a very different focus.
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Instead of trying to spread its bets, Federal Realty takes a concentrated approach and focuses all of its attention on a fairly small number of assets located in highly desirable areas. The average population within three miles of one of Federal Realty's properties is larger and wealthier than any of its peers can boast. Another interesting stat: Only 10% of the company's portfolio is located in areas where the median family income is $75,000 or less. That percentage is lower than any of the REIT's closest peers.
Federal Realty achieves this by being highly selective. It only operates in nine metropolitan areas, all of them key U.S. population centers that have high barriers to entry. In sum, Federal Realty basically owns the types of properties in which retailers most want to be located.
Federal Realty invests in its assets
Just having properties in great locations, however, isn't enough, and Federal Realty knows it. That's why it has a long history of development and redevelopment. Basically, it buys well-located properties and then puts money into them to make them increasingly desirable to customers and retailers.
There are a host of things that management does on this front. For example, it can simply give a center a facelift. But the REIT will usually look for ways to add even more value, such as by adding amenities or expanding the size of the asset to increase store space. Sometimes it will turn a retail property into a mixed-use asset by adding office space or apartments. (It often gets approval for such investments well in advance of starting a project, so it always has a pipeline of projects lined up.) The goal is to fine-tune each property so that it serves the community in which it sits in the best way possible. This is what allows Federal Realty to charge top-dollar rents.
That said, Federal Realty often buys strip malls that need some love. This makes sense, given the company's penchant for investing in the assets it owns. Once a property has been upgraded, however, Federal Realty isn't averse to selling it and using the proceeds to start the cycle over again. In this way, it captures the value it created, and can then create more value with a new asset. The company has played that cycle out time and time again.
The end result of this is highlighted by Federal Realty's 56 years' worth of annual dividend increases. That's the longest dividend-hiking streak among any REIT. It is a testament to the consistent success the company has achieved with what is, at its core, a fairly simple business model. The key is that Federal Realty executes extremely well. And that high level of execution is what supports the REIT's ability to keep growing its payouts year in and year out.
Federal Realty is not exciting, but it is reliable
Federal Realty is not going to knock your socks off with growth. In fact, over the past decade the stock's total return, which includes reinvested dividends, has lagged well behind that of the average REIT. Its exposure to physical retail assets in a world that's increasingly going digital has been viewed as a major negative by investors. It is a slow and steady dividend stock that is best seen as boring, but reliable.
And yet, during the pandemic, the REIT bought a handful of new assets, including adding in a new geographic region (Phoenix), while selling older properties. These assets will provide management with a new round of property investments to support its long-term growth. This won't turn Federal Realty's stock into a fast-rising bottle rocket, but it provides the foundation for continuing the dividend streak and, perhaps, it could lead to a faster rate of dividend growth than the low single-digit dividend growth that has been achieved of late.
