Strip malls are one of those properties that get very little respect but that we use every week on a regular basis. Reliable and boring is probably the best way to look at this real estate niche. If that sounds good to you, Brixmor (NYSE: BRX) is one of the largest names in the sector and offers a relatively generous 3.7% yield.
But before you pull the trigger, consider Federal Realty Investment Trust (NYSE: FRT). You'll have to give up 20 basis points of yield, but you'll be getting so much more. Here are some key advantages to consider.
Starting with the dividend
Real estate investment trusts (REITs) are specifically designed to pass income on to shareholders, so it makes sense to start a comparison on dividends. As noted above, Brixmor yields 0.2 percentage points more than Federal Realty. That's not much on an absolute basis, and it is just one factor to look at. For example, Brixmor suspended its dividend in 2020 because of the impact of the coronavirus pandemic. When the dividend came back in 2021, it was 25% lower than its pre-pandemic level. Basically, it looks like Brixmor used the pandemic to reset its dividend.
Federal Realty, on the other hand, increased its dividend by a token amount in 2020, noting specifically that it understands just how important the dividend is to shareholders. The dividend has been increased again in 2021 as well.
What's even more impressive is that the dividend has been increased annually for more than five decades, making Federal Realty a highly elite Dividend King. So it's nice that the REIT managed to hike during the pandemic, but that's just one of the many market dislocations that it has mastered over the years. Sure, you can get a slightly higher dividend yield from Brixmor, but most income investors will probably find Federal Realty's dividend record far more attractive.
Bigger isn't always better
Another factor that investors might find attractive about Brixmor is its sizable portfolio of roughly 390 properties, most of which have grocery stores in them. That affords the company a material amount of diversification, to be sure, but taking a simple look at things, it generated roughly $740 million per property in the second quarter. Federal Realty's portfolio has around 100 properties, which is much smaller. But it generated roughly $2.2 million per property. That's a huge difference.
So what's going on? Federal Realty has long focused on owning the best properties in the best markets. In fact, it only operates in nine metropolitan regions, recently adding Phoenix to its list of markets. They are all population-heavy and wealthy, making them the exact locations in which retailers want to operate.
In fact, even during the worst of the 2020 pandemic hit, Federal Realty was fielding calls from retailers that wanted to upgrade from nearby locations into one of its properties. It's not that Brixmor has bad locations, but it clearly doesn't have the same earnings power as what Federal Realty owns.
Another factor to consider is that Federal Realty is always making improvements to its properties. For example, it recently bought a handful of new properties with plans to enhance the financial results of each one. That includes re-tenanting, modernizations, and expansions, with the ultimate goal of pushing rent rolls higher. These internal projects provide opportunities for growth regardless of what's going on on Wall Street. To be fair, Brixmor has been focusing on similar opportunities, as well, and it has a deep pipeline of projects.
The real difference is in scope. Brixmor is spreading its work across a lot of smaller efforts, while Federal Realty is generally working on a smaller number of projects that will have a bigger impact on its overall portfolio. You can call this a wash, but when you add in the disparate operating performance and dividend history, Federal Realty just looks like a better option.
Not enough yield
In the end, Brixmor is a perfectly fine strip mall REIT. However, a 20-basis point yield advantage over Federal Realty isn't enough to make it more attractive, given how well Federal Realty operates its portfolio of highly desirable strip malls and regularly rewards shareholders while doing it. Don't get so caught up on the yields here that you overlook the equally, if not more important, quality factor.