It takes 50 consecutive years of annual dividend increases to earn the title of Dividend King. And only one real estate investment trust (REIT) has managed this distinction. Here's the secret behind Federal Realty's (NYSE: FRT) success and why investors are likely to see years and years of dividend growth ahead.
Federal Realty is a retail REIT. The bulk of its portfolio falls into the broader shopping center space (65% of rents), with the rest classified as mixed use (35%). Mixed-use assets bring together retail, office, and apartment assets, so even there, retail is still a major focus. Overall, about 75% of the company's properties have a grocery store in them, which tends to bring customers back on a regular basis.
The REIT's portfolio, however, is on the small side, with only a touch over 100 properties. Only that doesn't do justice to Federal Realty's size, as it has a roughly $9.5 billion market cap, which is in line with peers that have much larger portfolios.
The difference is that Federal Realty's collection of assets are highly curated. It's focused around eight major metropolitan areas, with assets in the first ring of the surrounding suburbs. In other words, it's keyed in on population-dense areas with wealthy households.
This is why, during the coronavirus-led downturn, Federal Realty was still fielding calls from retailers looking to get into its properties. The interesting thing about that, however, is that many of the callers already had nearby locations. So they were really seeking a chance to upgrade their real estate by getting into a Federal Realty property.
The real secret
The old saying in real estate is "location, location, location." And it would be easy to simply ascribe Federal Realty's long-term success, and its ability to achieve Dividend King status, to its portfolio of well-located properties. There is, to be honest, a material amount of truth in that. But it doesn't actually paint the full picture.
On Federal Realty's first-quarter 2021 earnings conference call, CEO Donald Wood explained what separates the REIT from its peers: "That is the secret sauce of a business, right, our business, how we balance occupancy with merchandising mix with the credit of that particular tenant." There's a bit of industry jargon in that statement, which could be simplified to "get the best tenants for each property." It's not a simple task.
For example, during 2020, restaurants suffered badly. However, increased eating out is a very important, long-term trend that brings people to shopping centers. Federal Realty could simply avoid restaurants because they are facing hardships today and, in some cases, are financially weak. But that would risk putting its properties at a long-term disadvantage.
Wood is "doubling down" on restaurants, instead, as he looks to create the "best places," which, in turn, increases Federal Realty's ability to charge the highest rents. The same logic basically applies to every potential tenant -- the REIT wants to add the retailers that will be the best additions to its properties, even if that means taking on some financial risk.
If history is any guide, the REIT knows what it's doing. For example, in the first quarter, Federal Realty's 102 properties generated $217 million in rent. Peer Kimco (NYSE: KIM) generated $279 million in rent across 398 locations. Doing some simple math, Federal Realty's properties brought in $2.1 million each in the first quarter, while each of Kimco's locations generated roughly $700,000. Clearly, Federal Realty's highly curated portfolio, including both its locations and tenant roster, is paying off.
Back to the dividend
At the end of the day, there are a lot of things that go into a 50-year long streak of annual dividend increases. However, when it comes to Federal Realty, one of the biggest things to understand is that it has created a relatively concentrated portfolio of well-located malls and made sure to populate them with top-tier tenants. That combination is what draws customers and generates high rental rates. And since management is clearly continuing to stick to this successful playbook, even during times of industry adversity, there's no reason to doubt its ability to keep dividend investors happy for years to come.