Federal Realty Investment Trust: Buying For The Recovery Play (NYSE:FRT)

Thesis

Federal Realty Investment Trust (NYSE:FRT) stands out as a quality dividend king in the world of real estate investment trusts (REITs) and offers a secure 4.7% yield, making it an attractive choice. It excels in terms of safety and quality among similar REITs, boasting prime properties, locations, and tenants. FRT reps a strong balance sheet, and has expert management.

With a remarkable 56-year streak of dividend growth and a solid plan for long-term growth exceeding 6%, Federal Realty is an excellent choice at these levels. The short term outlook has not been pleasant for REITs. It seems that any REIT with the slightest exposure to office buildings have been getting crushed but with the case of FRT, I am not concerned. The REIT has demonstrated resilience through various economic challenges and past recessions. Federal Realty Investment Trust presents an appealing investment opportunity.

Portfolio

The aspect I like most about FRT is their diversity of property types and locations. They have mixed use centers, community centers, power centers, and residential exposure all throughout the country, coast to coast. In fact, when it comes to their centers, 78% of them have some sort of grocery component to them. Grocery, the thing that people need to spend money on all year round, makes for one of the most consistent sectors of all.

The largest percentage of FRT’s income comes from Maryland, accounting for 21% of their total percentage of income by area. You will recognize a majority of their highly rated tenants as well! Highly recognizable and profitable companies such as T.J. Maxx (TJX), CVS (CVS), and Home Depot (HD) make up some of the largest percent of their tenants. Its properties are strategically located in thriving cities such as San Francisco, Los Angeles, Phoenix, Chicago, Boston, New York, Philadelphia, Washington DC, and Miami, boasting a robust demographic profile. With a highly diversified portfolio and a strong tenant base, Federal Realty stands out as a reliable choice.

FRT has implemented a successful “contractual rent bump” strategy that has helped continue to keep cash flow strong. The strategy consists of a tiered system where management boosts rent by either 2%, 3%, or 10% annually. This has applied to all types of properties is a contributing factor on why FRT has been able to consistently grow the dividend over the last 56-year period. I believe their strategy works and as shareholders, we can expect many more dividend raises in the future.

Dividend King

Despite facing a 27% decline from its peak, Federal Realty remains a top choice among 4.7% yielding kings. A dividend king is a small list of companies that have consistently raised their dividend payouts to shareholders for over 5 years. There are only 49 dividend kings out there and FRT happens to be one of them. Its impressive track record spans almost six decades, encompassing nine recessions and the recent pandemic crash. This also thriving through inflation rates higher than we’ve ever seen before. Despite these challenges, cash flow has remained strong enough to support dividend raises throughout all of this, and I personally expect many more raises into the future as we see the REIT market stabilize.

Alongside the 56-year dividend streak, management has been able to grow the dividend at an impressive average rate of 7% annually. We’ve also recently experienced a slight baby-like dividend raise of 1%.

Recovery Prospects

The REIT market has a whole has taken a sizeable hit this year and FRT is no exception. Federal Realty is expected to deliver steady growth that accelerates in the coming years. We already received confirmation of this growth on the most recent earnings call.

Leasing velocity continues to be the highlight. We signed 107 comparable leases of 576,000 square feet at $35.34 a foot, 7% higher than the cash basis rent the previous tenant was paying in the final year of their lease, 19% on a straight-line basis.

Demand was exceptional. When you include non-comparable leases, which, by the way, for us, largely relates to newly built out space on our redevelopment and development projects, along with our office leasing, we executed 135 leases in the second quarter for a very robust 652,000 square feet, representing $23 million of newly contracted annual rent. – Don Wood – Chief Executive Officer

While the dividend growth rate is set to double to 2% in 2024, the REIT is projected to regain its A-credit rating in 2026, potentially further boosting its growth rate.

Management’s long-term guidance of 6% growth aligns with its historical 7% growth rate. I believe the estimates are trying to account for the commercial office exposure. With the change in normal working environments and the rise of remote work, all REITs with any sort of office exposure has taken a hit. I do believe this is overdone though because now that the worst of COVID is behind us, we can slowly see companies starting to push employees back into the office. Management has calculated this as only 12% of FRT’s annual rent comes from offices and despite this, they still retained strong cash flows from this sector.

During the second quarter, Federal Realty achieved an unprecedented milestone, posting a record-high $1.67 in Funds from Operations (FFO) per share. This accomplishment resulted in a reduced dividend payout ratio of 64% for the quarter (66% on a year-to-date basis).

FRT’s properties were nearly fully occupied and leased during Q2, with an occupancy rate of 92.8% and a lease rate of 94.3%. Compared to the previous year, this marks a slight improvement of 0.80% and 0.20%, respectively. The company also issued $350.0 million in fixed-rate senior unsecured notes.

I personally think that buying at these levels would be a good entry point to capture a recovery play.

Comparison

When comparing FRT to some of its peers, we can point out some interesting observations. FRT has held up comparatively well in terms of total return against some of the peers. NNN REIT (NNN) comes in as the worst performer and Regency Centers Corp (REG) held up the best so fat YTD.

When zooming out, we can see that FRT has an excellent track in dividend raises compared to the same peer group.

Risk Profile

While no company is without risk, it’s important to acknowledge Federal Realty’s risk profile. The rise of e-commerce and the shift of traditional retailers toward online platforms could impact physical retail sales, leading to potential store closures and lower rental rates. Although, they seem to have been managing this front so far, we can still see the tides shift one day.

We may also continue to see a dramatic shift in the working environment for office workers. The negative outlook from office space exposure can continue to contribute to the downside movement. I imagine that as work from home continues to become the standard expectation, we will continue to see knee-jerk reactions in price for the short term future.

Lastly, I want to make note of the total return over the last decade compared to the same peer group. FRT may have proven to shareholders that they can consistently grow the dividend payouts for over 50 years, but unfortunately FRT has lacked in a total return aspect. I think ultimately, you may need to evaluate whether or not FRT matches your needs. If you are closer to retirement and depend upon reliable income generation, FRT may be for you. If you are looking for a better total return, maybe you should reconsider. We see that Agree Realty (ADC) and every other REIT in this peer group has outperformed FRT.

Conclusion

Federal Realty Investment Trust (FRT) emerges as a standout choice in the realm of real estate investment trusts (REITs). Its secure 4.7% yield, coupled with a remarkable 56-year streak of dividend growth, makes it an attractive and reliable option for income-oriented investors. FRT distinguishes itself through its portfolio diversity, encompassing various property types and prime locations across the United States.

The success of FRT’s “contractual rent bump” strategy and its ability to consistently grow dividends over nearly six decades showcase the strength of its management and commitment to shareholders. Despite recent challenges faced by the REIT market, FRT demonstrates resilience and a promising outlook for future growth.

While there are some potential risks, such as the impact of e-commerce and evolving office work trends, FRT’s strong tenant base and strategic locations position it well to navigate these challenges. It’s essential to consider your investment goals, as FRT may cater more to those seeking reliable income generation rather than high total returns.