Life is like a sine curve, with good periods followed by bad ones. Judging a company only by how well it does during the good years is a recipe for investment disaster. You also have to see how it handles adversity.
For Federal Realty Investment Trust (NYSE: FRT), the coronavirus pandemic was a headwind like none other in its long history. And it didn't just survive the blow, it managed to improve its already strong position in the retail sector. Here's what you need to know.
1. A few downturns under its belt
Federal Realty has been around the block more than a few times and proven its mettle. That is probably best seen in its incredible 54-year-long streak of annual dividend increases. That puts this real estate investment trust (REIT) in the highly exclusive Dividend King category. It has increased its dividend through multiple recessions, the OPEC oil embargo, the inflation of the 1970s, and several financial crises. But never before had it dealt with a pandemic that resulted in government-mandated business closures.
So, going into the 2020 coronavirus pandemic, there was reason to believe that Federal Realty would at least muddle through the hit. Only, it did more than that.
2. Out with the old; in with the new
The first big impact of the government closures was that weaker tenants permanently closed their doors. In many ways this just accelerated a trend that was already in place. Indeed, for years the so-called retail apocalypse had been pushing weaker stores that weren't keeping up with customer trends toward oblivion. When the pandemic hit, financially weak names that were barely clinging to life folded. Federal Realty had its fair share of troubled legacy retailers and early on expected its occupancy to fall into the mid-80% range.
But even from the early days of the pandemic the REIT got calls from retailers looking to move into its properties. Many had nearby locations and wanted to upgrade into a Federal Realty property. So, even during the darkest days, the strength of Federal Realty's well-located portfolio helped it excel.
3. Better than expected
It might not be so surprising after reading that last point that management's worst projections haven't come to pass. In the second quarter, which is expected to be the low point for occupancy, Federal Realty's portfolio was 92.7% leased. That's an impressive result given the earlier, fairly troubling projections from management. Although this outcome included replacing weaker tenants with stronger ones, don't overlook the fact that achieving this result required the company's existing tenants to fare better than anticipated as well. In other words, the underlying strength of Federal Realty's highly curated tenant base was also on display.
4. Taking advantage of an opportunity
While the company's leasing team was obviously working hard, so, too, was its investment arm. Indeed, Federal Realty used the downturn to buy four properties, one each in Virginia and California, markets it already served, and two in Arizona, adding a new state to the portfolio. CEO Don Wood noted during Federal Realty's second-quarter 2021 earnings conference call, "We strongly believe that pricing today would far exceed what we negotiated in the middle of COVID."
Each of these properties offers the REIT value-enhancing opportunities, from retenanting to redevelopment. And the two properties in Arizona open up a new market for future investment that just happens to be in a region seeing notable population growth. So not only did Federal Realty upgrade its tenant roster during the pandemic, it managed to add compelling new growth opportunities as well.
What happened when the chips were down
To swing things back around here, you can't judge a company only by what it achieves during good times. You might even argue that what a company does during bad times is the true sign of what it's made of.
The coronavirus pandemic was a terrible period for retail landlords, but Federal Realty still managed to come out the other side a better company than when it entered. You could say that COVID-19 changed Federal Realty for the better, but it's really more likely that this well-run REIT's many strengths were given an opportunity to shine.