O - Federal Realty Investment Trust: Deep Value For Passive Income Investors

2023-12-01 03:33:34 ET

Summary

• Federal Realty Investment Trust is a well-managed real estate investment trust that provides passive income investors with high-quality dividends.
• The trust has a well-utilized property portfolio and a moderate pay-out ratio, making it suitable for passive income investors concerned about a recession.
• Federal Realty Investment could be a core investment in a passive income portfolio alongside other strong retail investments like Realty Income Corp.

Federal Realty Investment Trust ( FRT ) is a well-managed real estate investment trust with a focus on commercial properties. The trust provides passive income investors with a steady stream of high quality dividends from its underlying real estate portfolio.

The trust is delivering strong FFO performance, has a well-utilized property portfolio and a moderate pay-out ratio in the mid 60s which allows for substantial long-term dividend growth. I also think that Federal Realty Investment is trust well-suited for passive income investors that are worried about a recession since FRT has historically well-performed during periods of economic stress.

Finally, Federal Realty Investment could be a core investment in a passive income portfolio, next to other strong retail investments like Realty Income Corp. ( O ) .

My Rating History

Federal Realty Investment provides passive income investors with a solid and highly predictable stream of income, which I pointed out in last year’s article about the trust titled A Rock Solid 4.3% Yielding Trust . The trust continues to grow its funds from operations and maintained strong lease metrics in 2023.

Federal Realty Investment’s Portfolio

Federal Realty Investment’s real estate portfolio includes commercial (mainly) and residential assets. At the end of the third quarter, the real estate investment trust’s portfolio included 102 open-air properties, 26 million square feet, 3,300 commercial tenants, and, in addition to that, 3,100 residential units.

The trust’s commercial assets are primarily located in big metropolitan markets such as Boston, New York, Chicago, Miami and Southern California which have favorable economics such as above-average household income and growing populations.

Residential and mixed-use offices make up only 22% (combined) of the trust’s rental split. Commercial assets produce the majority of income for the real estate investment trust and consist mainly retail assets that are leased to tenants like TJX, CVS Pharmacy or GAP.

Federal Realty Investment’s commercial portfolio had a lease rate of 94% which was pretty much stable in the last year. The residential portfolio, which included 3,104 residential properties, had a lease rate of 97.8% which was also stable YoY.

The commercial portfolio is more vulnerable to recessions, obviously, but the trust has managed to perform well, historically speaking, even during periods of slowing or negative rates of economic growth.

This resilience has been reflected in substantial FFO out-performance since 2005 relative to other retail-focused real estate investment trusts, including Kimco Realty Corporation ( KIM ) .

Steady FFO Growth And Moderate Pay-Out Ratio

Federal Realty Investment produces highly predictable cash flow from its underlying real estate portfolio, which in itself has enormous value for passive income investors that rely on FRT’s dividends during their retirements.

To determine the attractiveness of a passive income investment, two factors are of paramount performance:

1. A trust’s ability to grow its FFO (and therefore its dividend) reliably; and
2. A moderate pay-out ratio that provides investors with a reasonably high margin of safety that implies that a downturn in the commercial real estate market won’t immediately translate to a dividend cut.

Federal Realty Investment’s portfolio produced $137.0 million in FFO, reflecting 5% YoY growth. FFO per diluted share, key to determining the pay-out ratio, rose 4% YoY in 3Q-23. The implied pay-out ratio in 3Q-23 as well as 9M-23 was 66%. As an owner of FRT myself, I think the dividend has a high margin of safety. Realty Income and Kimco Realty, to provide two additional reference points, had 3Q-23 pay-out ratios of 74% and 58%.

Raised Guidance For 2023, Valuation Multiple Is Attractive

Federal Realty Investment raised its guidance for 2023 FFO in the third quarter. The real estate investment trust now sees $6.50-6.58 per share in FFO this year, up from a guidance of $6.46-6.58 per share. The implied year-over-year growth rate in FFO is now between 3-4%.

The stock of Federal Realty Investment is presently selling at $94.04 which implies an FFO multiple of 14.4x. The most comparable trust to compare Federal Realty Investment is probably Kimco Realty, which I evaluated here . Kimco Realty, based on a guidance of $1.56-1.57 per share in FFO, is selling at a 12.1x FFO.

Realty Income, which has branded itself as the monthly-dividend company also has a large retail-focused real estate portfolio, though Realty Income is diversifying into other real estate sub-sectors like gaming . Realty Income’s stock is presently selling for a 13.1x FFO multiple.

Federal Realty Investment And Investment Risks

The pandemic hurt Federal Realty Investment quite significantly, though the trust’s FFO and portfolio performance improved quickly as the pandemic fizzled out. Pandemics, consumer spending downturns and a real estate recession are risks for passive income investors.

With that being said, the dividend is well-covered and the focus on retail properties in strong metropolitan areas is an asset for FRT.

My Conclusion

Federal Realty Investment has produced solid portfolio and FFO performance in 2023 and the stock could be a core holding for a passive income investors that are concerned about FFO and pay-out stability.

The trust is focused on core markets in major cities that have strong economic fundamentals in terms of population growth and household income, which adds above-average FFO performance.

Furthermore, FRT has shown strong FFO resilience during times of economic stress, like during the Covid-19 pandemic or the Global Financial Crisis.

With a pay-out ratio in the mid 60s, the pay-out metrics are better than those for Realty Income.

I see FRT as a core holding for my passive income portfolio that should deliver dividend growth even during the next recession.

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