The properties that shopping center-focused real estate investment trust (REIT) Federal Realty Investment Trust (NYSE: FRT) owns haven't been performing particularly well in the face of the global pandemic. Although off its early year lows, the stock is still down around 40% for the year. But if you focus too much on today, you could miss the long-term opportunity here. Federal Realty could easily help you get rich... slowly.
The portfolio is the key
During the worst of the economic shutdowns used to slow the spread of COVID-19, Federal Realty only managed to collect around half of the rent it was owed. That's pretty bad, but not surprising given that 80% of its rent roll comes from retail tenants. The biggest problem spots have been things like gyms, restaurants, and apparel stores. The rest of its top line comes from a mix of apartments, 11% of rents, and office, 9%, which are both performing quite well despite the headwinds.
Things are getting better. By the end of the third quarter, 94% of Federal Realty's retail tenants were open again in some capacity. Rent collection in the third quarter, meanwhile, averaged 83%. That's a vast improvement, but still nowhere near back to the level that supported the REIT's 53-year-long streak of annual dividend increases. Although the board announced a dividend increase in August to signal its belief in the long-term future of the business, the stock price clearly indicates that investors remain worried about Federal Realty's near-term outlook.
But things start to look a lot brighter when you step back and look more closely at the portfolio of properties that Federal Realty owns. This isn't a REIT that looks to grow for the sake of growth. It only owns 104 properties with the focus on well-positioned open-air shopping centers and mixed-use developments in wealthy, highly populated areas. Federal Realty invests in these assets and curates its collection of tenants to ensure they remain vibrant and desirable for shoppers and lessees.
During Federal Realty's second-quarter earnings conference call, Wendy A. Seher, the REIT's Eastern Region President, specifically noted that leasing activity was slow but that the companies she is talking to want to "upgrade their real estate." In other words, companies are looking to get into Federal Realty properties because they would be an improvement over their existing location. The REIT actually signed 50 new leases in the second quarter. Roughly 90% of the square footage that was leased in those deals was previously occupied -- the average rent increase over the last tenant was 11%. So, at the property level, Federal Realty is continuing to perform quite well despite the headwinds.
It may be an old saying, but location, location, location is a truism that you can't overlook here. With the stock still down so much in 2020, the 5.4% dividend yield sitting near its highest levels since the last recession, and the underlying performance of the REIT's properties starting to recover, now is the time to take a really close look at Federal Realty and its well-positioned portfolio.
Slow and steady
To be fair, you shouldn't expect Federal Realty to double overnight. That's just not the type of company it is, or has ever been. But it is well-positioned to slowly help you build a million-dollar portfolio over time as it works to keep its highly desirable properties in tip-top form. That, in turn, will allow the REIT to continue rewarding investors with dividends while at the same time increasing the value of the assets it owns. When the world has finally learned to deal with COVID-19, meanwhile, investors will likely get over the fear that grips them today and reevaluate Federal Realty's collection of open-air centers. In other words, if you don't act now, while investors are still scared, you could miss out on some of the upside here.