Dividend Aristocrats In Focus: Federal Realty Investment Trust

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Dividend Aristocrats In Focus: Federal Realty Investment Trust


Updated on March 11th, 2021 by Bob Ciura

When it comes to dividend growth stocks, the Dividend Aristocrats are the “cream of the crop”. These are stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases. Additionally, the Dividend Aristocrats must meet certain market cap and liquidity requirements.

It is relatively difficult to become a Dividend Aristocrat, which is why there are only 65 of them. With that in mind, we created a full list of all 65 Dividend Aristocrats. You can download your copy of the Dividend Aristocrats list, along with important metrics like price-to-earnings ratios and dividend yields, by clicking on the link below:

 

At the same time, Real Estate Investment Trusts (REITs) seem like natural fits for the Dividend Aristocrats. REITs are required to distribute at least 90% of their earnings to shareholders, which leads to steady dividend growth for the asset class, provided earnings grow over time.

And yet, there are only 3 REITs on the list of Dividend Aristocrats, including Federal Realty Investment Trust (FRT). The reason for the relative lack of REITs in the Dividend Aristocrats Index is primarily due to the high payout requirement of REITs. It’s difficult to grow dividends year-in-and-year-out when the bulk of income is being distributed, as this leaves little margin for error.

Federal Realty has a very impressive dividend history, particularly for a REIT. Federal Realty has increased its dividend for 53 years in a row, which makes it a Dividend King as well. This article will discuss the only REIT on the list of Dividend Aristocrats and Dividend Kings.

Business Overview

Federal Realty was founded in 1962. As a Real Estate Investment Trust, Federal Realty’s business model is to own and rent out real estate properties. It uses a significant portion of its rental income, as well as external financing, to acquire new properties. This helps create a “snow-ball” effect of rising income over time.

Federal Realty primarily owns shopping centers. However, it also operates in redevelopment of multi-purpose properties including retail, apartments, and condominiums. The portfolio is highly diversified in terms of tenant base. Federal Realty has a high-quality tenant portfolio.

Source: Investor Presentation

The trust’s investment strategy is to pursue densely-populated, affluent communities, with high demand for commercial and residential real estate. This strategy has fueled strong growth over the past several years.

2020 was a very difficult year for Federal Realty, and the entire REIT group, as the coronavirus pandemic caused store closures across the country. Federal Realty reported Q4 earnings on 02/11/21. FFO per share came in at $0.99, down sharply from $1.58 in the year-ago quarter. Total revenue came in at $219.5M, down from $239.1M in the year-ago quarter. The portfolio was 92.2% leased as of December 31, 2020.

Despite the steep declines, there were some positive signs. The company sold three properties for combined gross proceeds of $170 million in Q4.During the fourth quarter they also signed 103 leases for 468,901 square feet of retail space, demonstrating leasing volumes at pre-COVID levels. Meanwhile, FRT issued $400 million of green bonds and ended the quarter with $798million of cash and cash equivalents and total liquidity of $1.8 billion.

Growth Prospects

Prior to 2020, Federal Realty’s funds-from-operations had not dipped year-over-year at any point in the past decade, a tremendously impressive feat given that the trust operates in the highly cyclical real estate sector.

While growth numbers have not always been impressive, the simple fact that it has such a consistent track record of safety and stability when it comes to funds-from-operations and dividends per share makes it one of the most desirable REITs in the market.

Federal Realty’s growth moving forward will be comprised of a continuation of higher rent rates on new leases and its impressive development pipeline fueling asset base expansion. Margins are expected to continue to rise slightly as it redevelops pieces of its portfolio and same-center revenue continues to move higher.

As the economy emerges from the COVID-19 crisis, we expect results to support the long-term thesis for Federal Realty as same-store NOI continued to grow and occupancy remains robust. The industry has seen some high-profile bankruptcies, although Federal Realty has largely been immune.

Competitive Advantages & Recession Performance

One way in which REITs establish a competitive advantage is through investing in the highest-quality portfolios. Federal Realty has done this by focusing on affluent areas of the country, where demand exceeds supply. This is also how it can continue to boost its cash basis rollover growth over time; it owns properties in the most desirable areas and tenants are willing to pay more to gain access to the best consumers.

Federal Realty benefits from a favorable economic backdrop, with high occupancy rates, and the ability to raise rents over time.

Another competitive advantage for Federal Realty is a strong balance sheet. The trust’s senior unsecured debt holds a credit rating of A- from Standard & Poor’s, which is solidly investment-grade, and is a high rating for a REIT. A strong balance sheet helps keep borrowing costs low, which is critical for the REIT business model.

These competitive strengths allowed Federal Realty to perform well during the last recession. Federal Realty’s FFO during the Great Recession is shown below:

FFO either held steady, or increased, during each year of the recession. This was a remarkable achievement, and speaks to the strength of the business. We expect Federal Realty to hold up well during the next downturn, but we note that growth will certainly slow during such a period. Federal Realty, thanks to its strong balance sheet, would likely be a net acquirer during the next downturn to build for future growth.

Valuation & Expected Returns

Based on 2021 expected FFO-per-share of $4.54, Federal Realty stock trades for a price-to-FFO ratio of 23.7. Investors can think of this as similar to a price-to-earnings ratio.

On a valuation basis, Federal Realty appears overvalued. Our fair value estimate is a P/FFO ratio of 15, implying significant downside potential due to the high current P/FFO ratio.

Therefore, future returns could be reduced by -8.7% per year over the next five years, if the P/FFO ratio declines from 23.7 to 15. FFO-per-share growth, expected to reach 12% per year, plus the 4% dividend yield, result in total expected returns of 7.3% per year.

The current dividend yield of 4% is a fairly low yield for a REIT. However, Federal Realty helps make up for this with strong dividend growth and its impeccable track record. It has increased its dividend for 53 years in a row.

Dividend growth has slowed in recent years as a result of Federal Realty paying less of its FFO-per-share in distributions. We expect growth to return in the future to past levels as the trust has seen ups and downs in its payout growth rate, but it always moves higher.

Final Thoughts

Investors flock to REITs for dividends, and with high yields across the asset class, it is easy to see why they are so popular for income investors.

Federal Realty does not have a high dividend yield, particularly for a REIT. This is because the stock consistently trades for a relatively high valuation. However, high-quality businesses tend to sport above-average valuations.

That said, Federal Realty is a strong choice for dividend investors, and we rate the stock a hold due to its impressive dividend history.

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