Federal Realty Investment Trust‘s (NYSE:FRT) yield spiked to more than 6% in 2020. The coronavirus pandemic had a lot to do with that, and it ended up providing an incredible buying opportunity for investors.
Let’s take a closer look at why that happened and why (should the market fall again) you’ll want to add this REIT to your wish list now so you are ready to pounce when the next big buying opportunity comes along.
An impressive record of giving back
If you like dividends, you probably know about Dividend Aristocrats — S&P 500 companies that have increased their dividends annually for at least 25 consecutive years. It takes some real effort for companies to reach that status. However, less well known are the companies that earn the unofficial title of Dividend Kings. These names have managed to increase their dividend annually for at least 50 consecutive years.
Federal Realty Investment Trust is one of the rare companies that fall into that exclusive group. You don’t put up a streak like that by accident.
This consistently strong performance relies on a very focused portfolio of properties in the retail space. It also helps explain why 2020 was such a difficult year for Federal Realty’s stock, as investors dumped names that could be at risk from the pandemic-related economic closures. It was a tough period, with the REIT’s rent collections falling early on and store closures putting pressure on its occupancy rate.
But Federal Realty, understanding that its dividend is important to shareholders, increased it in the third quarter of 2020 just the same, believing that its properties would rebound as they had during previous economic downturns.
Why is Federal Realty so confident?
There are a couple of reasons for management’s belief in its ability to recover from the pandemic. For starters, 75% of its roughly 100 or so strip mall and power center properties include grocery stores. These types of stores were allowed to stay open throughout the pandemic as essential services. From a longer-term perspective, meanwhile, grocery stores tend to result in repeat visits to a property. So they are very desirable tenants to have around in both good times and bad.
In addition to its property-type focus, Federal Realty is also very careful with where its properties are located. Its portfolio is actually on the small side in the strip mall sector, with many of its peers owning several hundred locations. Federal Realty’s highly curated list is centered around key U.S. markets that include major metropolitan centers, like Boston, New York, Washington D.C., Los Angeles, Chicago, and Miami, among others. The goal is to be situated in population-dense regions that have high average incomes. Basically, it wants to be in places where retailers want to be.
The desirability of its assets was on display during the pandemic when it was fielding calls from retailers with nearby locations owned by other landlords. These retailers wanted to upgrade their real estate, and that meant moving to a Federal Realty property. In fact, leasing has been so strong that during Federal Realty’s first-quarter 2021 earnings conference call, management updated its occupancy outlook. While it expects downward pressure to continue for a couple of quarters, the trough shouldn’t be as bad as the company had originally feared. In other words, Federal Realty’s business is bouncing back quickly and strongly. But that’s just par for the course here, given the time management puts into making sure its properties are best-in-class.
Is now an opportunity to buy?
Federal Realty’s roughly 3.6% dividend yield is well below the peak it hit in 2020. However, 3.6% is toward the high end of the REIT’s 10-year yield range, so investors willing to pay a fair price for a great company might still be interested here.
That said, if you have a value focus and prefer to buy when things are really cheap, this is the type of name to keep on your radar screen at all times, just in case there’s a market dislocation. The yield notably also spiked during the 2007-to-2009 recession. The key here, however, is that no matter when you buy it, this is the type of dividend-paying company you buy and hold for a very long time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.