- Federal Realty is the only REIT that has been crowned a Dividend King, with more than 50 consecutive years of annual dividend increases.
- FRT is an integrated REIT spanning several sectors of real estate, creating diversified income that has navigated every major crisis in the past 50 years.
- FRT is now on my watch list, but $85 is the magic number that makes it a buy as I want REITs to generate at least a 5% yield.
I love investing in REITs as this provides me with exposure to the real estate sector without having to deal with tenants or the headaches of property management. Federal Realty Investment Trust (FRT) is a diversified REIT with assets across real estate's retail, residential, office, and hotel sectors. FRT is also the only REIT that has become a Dividend King , having increased its dividend annually over the previous 54 years. Since topping out at around $140.51 at the beginning of 2022, shares of FRT have declined by roughly -$43.59 or -31.02%. I have added FRT to my REIT watch list, as it's inching closer to an attractive entry point. I think if shares decline by another -$11.92 (-12.23%), FRT will be a strong buy as this will place its yield at 5.04% and its price to FFO ratio at 14.17x. I'm a buyer of FRT around the $85 level and will be watching FRT closely as this is a REIT that I want to own.
Why An Optimal Entry Point For FRT Is Roughly $85 In My Opinion
I love investing in REITs as I believe real estate is an important segment that investors should have exposure to. REITs typically offer larger than average dividends and tend to attract income investors. Investors focused on capital appreciation don't generally pay attention to REITs unless there is a compelling opportunity from a mispriced equity. Historically, REITs haven't generated the same level of capital appreciation as investing in Apple (AAPL) or Microsoft (MSFT). The Vanguard Real Estate ETF (VNQ) is often regarded as a benchmark for the REIT sector, as it has over $40 billion of assets under management . Going back to 2005, the Vanguard S&P 500 ETF (VOO) has appreciated by 242.36%, while VNQ has generated 83.24% of capital appreciation for its investors.
I have a 5% dividend rule for investing in REITs which I have only broken once with Realty Income ( O ). When I look at REITs, I go into the investment with my eyes wide open. They are, first and foremost, an investment focused on generating income with a secondary objective of generating capital appreciation. I can invest in many different utilities, including Southern Company ( SO ) or Consolidated Edison ( ED ), and generate a dividend yield in the mid-3% range. I could also invest in beaten-down tech companies such as Intel Corporation ( INTC ) or Cisco Systems ( CSCO ) and generate a mid-3% yield with possible significant upside potential. This is why when I look at REITs, I want to generate at least 5% from their dividend as they are less likely to appreciate than other asset classes, and I am strictly looking at them as income plays.
According to Seeking Alpha, FRTs peer group is:
- National Retail Properties ( NNN )
- Brixmor Property Group ( BRX )
- Agree Realty Corporation ( ADC )
- Spirit Realty Capital ( SRC )
- Regency Centers Corporation ( REG )
At FRT's current valuation, it's not yet attractive, but it's getting closer. FRT has a current dividend yield of 4.42%, which is just under the peer group average of 4.72%.
I don't like overpaying for a REIT's funds from operations ((FFO)). FFO is the equivalent of a traditional equity's EPS as this is the pool of capital dividends are paid from, and the metric used to evaluate REITs. The Peer group has an average price to FFO ratio of 14.37x, with 3 companies falling under this metric (BRX, SRC, NNN) and 3 companies coming in above this level (REG, FRT, ADC). I would like to see FRT's price to FFO get closer to the group's average prior to investing in them.
I also look at the EBITDA to total debt ratio, as I want to make sure that a REIT's debt level is manageable. The peer group has a tight range from 4.91x to 6.9x on an EBITDA to total debt metric. FRT has the worst ratio of the group at 6.9x, but this isn't bad considering other REIT sectors I have evaluated. 6.9x is perfectly acceptable for me, as its total debt of $4.19 billion is completely manageable.
My buy level for FRT is $85 per share for two reasons. First, it would bring FRT's dividend yield just above 5%. This would place FRT's yield slightly above the peer group average of 4.72%. The second reason is that it puts FRT at a much more competitive price to FFO level. At its current valuation, you are paying 16.15x for FRT's FFO, compared to the peer group average of 14.37x. If FRT fell to $85 without its FFO changing, it would bring its price to FFO ratio from 16.15x to 14.17x. FRT's price to FFO would be slightly below the peer group average. I am not sure if shares of FRT will continue to decline, but I am not a buyer just yet. While I like many things about the company, $85 is a much more attractive valuation based on where I want to be for an entry price.
Outside The Current Valuation, FRT Has A Lot Of Positives From An Investment Standpoint
FRT's objective is to own, manage, acquire, and redevelop a portfolio of high-quality retail-focused properties. Their focus is to provide increasing cash flow for distribution to its shareholders, with the potential of capital appreciation, while protecting investor capital. FRT's properties are generally located in some of the most densely populated and affluent areas of the country. These demographics help tenants generate higher sales, which has generally enabled FRT to maintain higher occupancy rates, charge higher rental rates, and maintain steady rent growth. This combination has helped increase the value throughout its portfolio.
I like FRT's integrated real estate approach as their 104 properties include 3,100 commercial tenants and 3,400 residential residents across 25 million sq feet of space. An aspect that sets FRT's properties apart from other REITs is that over 75% of its locations have a grocery component. I am a fan of this approach because grocery stores act as conductors for commerce. Everyone needs to buy groceries, and a large percentage of the population still buys groceries at brick-and-mortar locations rather than through delivery services. This increases the number of people who visit retail centers with a grocery component, which increases the probability of potential customers visiting a neighboring location.
FRT has a diversified income stream and portfolio composition, which is also a positive. FRT's top 25 tenants account for 26% of their rental income, and they have 3,100 tenants across 104 properties. In their top 25 tenants, you will find names such as Kroger, Whole Foods, CVS, Home Depot, and Dicks Sporting Goods. The largest sector of their portfolio is restaurants at 16%, followed by residential and office space at 11% each, then grocery & drug at 9%. The large anchor properties consisting of 10,000 sq feet or more account for 39% of their annualized base rents.
FRT has a strong pipeline of projects to help drive future revenue. There are 6 additional redevelopment projects underway in addition to 5 redevelopment projects that became stabilized in 2021. FRT also acquired Kingstowne Towne Center located in Virginia's Fairfax Country. This location provided FRT with 410,000 sq feet of leasable space on 45 acres. The surrounding 3-mile radius has 45,439 households with a population of 117,672 and an average household income of $141,427.
Federal Realty Investment Trust
FRT is also the only REIT to be classified as a Dividend King, having paid and increased its dividend annually for more than 50 consecutive years. FRT has one of the most accomplished track records in the REIT space and has increased its annual dividend throughout every crisis in my lifetime. From the oil embargo in the 70s to the Financial crisis in 09 and through a global pandemic, investors have been able to count on consistent income being generated from their investment in FRT while getting an annual dividend increase. FRT may not have the largest yield, but its consistency is worth its weight in gold.
Conclusion
FRT has a long history of generating value for its shareholders. The declining share price has made FRT more attractive as a potential investment. I like everything about FRT, from its business model to the dividend, but my main hang-up is the valuation. While shares have declined over 30% from their peak, I really want to see them decline a bit further before I start a position. I have placed FRT on my watchlist and would be a buyer for around $85. This would place FRT's dividend yield just above 5% and put its price to FFO ratio just under its peer group average.
For further details see:
Federal Realty Is Yielding 4.42%, The Only REIT Dividend King Is Getting Closer To Buy Territory