During the COVID-19 pandemic, when many of its peers were just limping along, Federal Realty (FRT -0.37%) did something different -- it bought new strip-mall properties. There were multiple reasons for this purchase activity, but the big takeaway is that the New York-based real estate investment trust (REIT) is willing to act when it sees opportunity.
So what is Federal Realty doing today? It isn't buying properties right now despite some encouraging industry signs, but management does think the time to buy is quickly approaching.
Some early, hopeful signs
In one hopeful sign for the sector, competitor Site Centers (SITC -1.03%) announced on Oct. 30 that it was going to break itself in two so that one of the new businesses could focus on what it sees as attractive strip-mall assets coming to market now.
Federal Realty isn't quite there. A Wall Street analyst on the REIT's latest conference call with investors asked if there were acquisition opportunities ahead. The answer was, essentially: not yet.
Image source: Getty Images.
Ready to act but only when the time is right
Federal Realty prefers to buy opportunistically -- especially when there's some outside factor causing problems for sellers.
The most recent example was the COVID-19 pandemic when the REIT bought a handful of properties, including two assets in a new geographic market (Scottsdale, Arizona). The pandemic was a terrible time for retail assets thanks to the social-distancing efforts that were used to slow the spread of the coronavirus. That resulted in property-level troubles, including non-paying tenants, depressed demand, and, ultimately, increased vacancy rates.
Federal Realty saw the dislocation caused by the pandemic as an opportunity to go hunting. It has worked out exceptionally well. Management noted during the third-quarter earnings call that the performance of the acquired assets has been better than it expected when it bought the properties.
Federal Realty would like to see more, for lack of a better word, pain before it starts buying again. And it expects that pain to show up relatively soon as result of a large amount of debt coming due in the next few years on the types of properties it likes to own. Exacerbating the impact of that debt maturing will be the impact of higher rates on key lenders, like banks.
This view is very similar to that of another REIT, Realty Income (O -0.17%), which owns single-tenant retail properties. According to Realty Income, there is $1.2 trillion worth of debt maturities on tap between 2023 and 2026 in its addressable universe within the S&P 500 index. Those companies own $1.6 trillion worth of property that could be sold to pay off the debt.
While Realty Income and Federal Realty operate in different niches, the story is basically identical. Debt will come due, and there will be few attractive options for rolling it over because rates have risen dramatically.
For Realty Income, the ideal outcome will be a sale/leaseback deal. For Federal Realty, the best result will be the purchase of property from an owner that is facing a debt cliff it can't surmount. That level of distress, meanwhile, should result in attractive purchase prices for patient investors.
Patience is a virtue for Federal Realty
Federal Realty proved during the pandemic that it will act quickly when it sees an opportunity. It isn't acting today because it doesn't believe the opportunity is there yet, but it says it is fast approaching. Financially strong REITs could be in an increasingly good position to grow as debt starts to roll over at higher rates. That's a story that is not specific to Federal Realty although the REIT is likely to be an active acquirer just the same.
