Summary
- Federal Realty Investment Trust has raised its dividend 51 consecutive years and has a Standard & Poor’s A- credit rating.
- Federal is the second largest real estate investment trust in the Shopping Centers sub-sector and has outperformed the peer average by 7% over the past 15 years.
- Mixed-use properties–retail, residential and office buildings–comprise one-third of the company, including Santana Row in Silicon Valley and Assembly Row in Boston.
Introduction to Federal Realty Investment Trust
Federal Realty Investment Trust (FRT) is the second largest REIT in the Shopping Centers sub-sector, with 110 properties in twelve states and the District of Columbia and an equity market capitalization of $9.572 billion. It is one of only nine REITs with a Standard & Poor’s credit rating of A or A-. Since 1968, FRT has raised its dividend 51 consecutive years, weathering six recessions and giving FRT the 24th longest streak among all companies.
For the past 15 years, Federal’s funds from operations growth has outperformed its Bloomberg shopping center peer average by a margin of 7%. FRT’s competitive advantage is its ability to design, build and manage large, mixed-use developments that combine retail, residential and office space, such as Santana Row in San Jose, CA; Pike & Rose in North Bethesda, MD; and Assembly Row in Somerville, MA.
FRT’s strong leadership team has an unusual ability to envision and execute the densification of a property to maximize its attractiveness, functionality and profitability. Federal knows how to engage and bring together world class retailers and architects as well as local residents, merchants and judicatories to improve community life, the environment and the flow of pedestrian and vehicular traffic.
Strengths
Federal Realty’s leadership team maximizes the organization’s skill and experience, which produces strong growth and profitability in a difficult retail environment, driven by a mixed-use approach anchored in retail but embracing residential, office and community sustainability.
- FRT’s strong management team led by Don Wood, CEO since 2002, effectively cultivates human capital and uses regional offices such as a new one in northern Virginia, to implement throughout the company the best practices learned from their large, mixed-use developments.
- Federal’s consistently strong financial performance in a tough retail environment is reflected in its A- S&P credit rating and its ability to annually produce $75 to $100 million in free cash flow after dividends and capital expenses. FFO has grown for 9 consecutive years, including 5.4% growth in 2018. FFO guidance for 2019 is $6.30 to $6.46, a 2.4% increase at the $6.38 mid-point over 2018 FFO of $6.23.
- Federal’s powerful business model uses its “big three” mixed-use developments (Santana Row, Assembly Row and Pike & Rose) to drive the transformation of its core shopping center portfolio, with an eye to redevelop potential acquisitions or existing properties (such as adding 200 apartments to the Graham Park Plaza in Falls Church, Virginia).
- FRT has developed a “can do” culture (1+1+1 = 4) that brings shared expertise and cross-fertilization across all properties and regions. The company can apply significant human resources to each project. In the Q1 2019 Earnings Call Don Wood referenced CocoWalk in south Florida, “with those big opportunities. …we have our entire team there and that is all about the blocking and tackling of getting deals done.”
Weaknesses
Federal Realty operates in a tough bricks and mortar retail environment that has seen lessee bankruptcies, and an oversupply of retail space as well as a sometimes difficult entitlement process for new construction or redevelopment.
- This is a difficult time for bricks and mortar retail and for many retail REITs. FRT is one of the best, but retail is a maelstrom. Federal Realty benefits from its mixed-use developments, though management insists retail is the mixed-use base, augmented by residential and office.
- FRT has built solid relationships with many great retailers, and FRT’s best properties are in high demand. But, FRT is not immune from this “disruptive time” for retail. In the Q1 2019 Earnings Call, CEO Don Wood referred to the recent wave of retail bankruptcies as “the new normal.”
- Federal Realty’s premium properties have provided rising rents, but sometimes oversupply creates a negotiating advantage for the lessee. In the Q4 2018 Earnings Call, Don Wood cited an example of a retailer who was prepared to move to competitor site at lease renewal, and FRT reduced the rent to keep the tenant.
- FRT developments involve long planning processes that require affirmative decisions by multiple constituencies. Federal’s Sunset Place project in south Florida has had multiple delays.
Opportunities
Federal Realty’s successful track record of envisioning and executing new mixed-use possibilities for existing and new properties puts them in excellent negotiating position with retailers, apartment and condominium developers, office space seekers and community leaders eager to create desirable spaces for living, working and playing.
- Potential tenants are drawn to FRT due to the company’s reputation and prior experience. An analyst noted in the Q1 2019 Earnings Call that 40% of FRT’s leases have been new leases, compared with peers’ 15%. Don Wood replied, “…better real estate…should be able…to attract new tenants for a new economy for … new consumer … behavior.”
- Federal Realty is well-positioned to develop additional premium mixed-use properties, so that the “big three” could become the “big five” or more.
- Given today’s retail difficulties, FRT is in an unusual position to negotiate termination fees at the beginning of a lease. This reflects the desirability of their properties and these “term fees” provided $7.7 million in 2018 revenue, up from a recent average of $4.5 million.
- FRT has the financial strength and the corporate expertise to analyze properties with an eye for the “highest and best” land use, based on listening to the local community. While always alert for acquisition opportunities, FRT prefers to use their local knowledge to redevelop or expand their current portfolio properties.
Threats
Federal Realty is vulnerable to general and local economic downturns, to rising interest rates, to new competition and to natural or human-caused disasters.
- A national economic recession could mean less demand for FRT’s retail space.
- Weakness in local job markets where FRT operates can hurt specific properties and regions.
- Higher interest rates would increase lessees’ borrowing costs and make it more expensive for FRT to borrow money or issue preferred stock.
- Competition can come from an oversupply of retail space in FRT’s markets, from increasing online sales, or from new entrants into the mixed-use development space.
- Specific properties can be damaged by fire, floods, storms (hurricanes in South Florida), geological change (earthquakes in California), social unrest or human malevolence.
Long-term outlook for Federal Realty Investment Trust
Among REITs with retail exposure, Federal Realty is one of the best positioned for continued growth due to their financial strength, strong management, a culture of success and their business model. As described in their 2019 Investor Day webcast, FRT will develop other large, mixed-use destinations (like Santana Row, Pike & Rose and Assembly Row), and they will continue to apply lessons learned from the “big three” to their core shopping center properties. In the Q4 2018 Earnings Call, Don Wood said of the big mixed-use properties: “…yes they take a long time to get up and yes they take a long time to mature but they are the gift that keeps on giving.”
Our SWOT analysis is meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company’s business, can we start to understand whether or not to invest our hard earned money.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FRT over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
