The global pandemic has been brutal for the retail sector and the real estate investment trusts (REITs) that house them. But even during the worst of the economic shutdowns used to slow the spread of COVID-19, Federal Realty Investment Trust (NYSE: FRT) didn't waver in its belief that the future remained bright. Here's why and what it means for investors.
A difficult time
There's no way to candy coat what happened to retail-focused REITs: When the government forced nonessential businesses to shut down in the early days of the coronavirus pandemic, rent collection rates plunged. It's pretty simple logic; if a store isn't open for business, it can't earn the money to pay rent. Federal Realty saw its rent collections fall into the 50% range at the worst of it.
That's a terrible number, but management never wavered in its belief the company was well-positioned to handle the hit and keep paying its dividend. In fact, Federal Realty even announced a dividend increased in May while retailers were still suffering through shutdowns. The decision was a sign of strength and statement to investors.
Two key takeaways
Federal Realty was able to both pay and increase its dividend for a couple of important reasons. The first -- and most important right now -- is that the investment grade-rated REIT has a rock-solid balance sheet. It was able to raise debt at attractive rates when trouble hit to ensure it had enough cash on hand to muddle through the rough patch. With a solid cash cushion, it's been able to refocus on the long-term outlook for its business, which remains very strong.
Federal Realty isn't your typical retail REIT. It's been around for a long time (it has an incredible 53-year streak of annual dividend hikes behind it) and has a carefully curated portfolio. In fact, it only owns around 100 shopping centers and mixed-use developments. They are specifically located near densely populated areas with wealthy residents and contain highly frequented businesses, like grocery stores. These are places people want to shop at and in which retailers want to be located.
Some numbers will help. The second quarter was the hardest hit by COVID-19, but that didn't stop Federal Realty from inking 50 leases in the three-month span. It followed that up with 101 leases signed in the third quarter, which is pretty much back-to-normal levels for the REIT. Obviously, retailers want to be in the company's shopping centers, with third-quarter occupancy at a solid 92% in September.
What's more telling, however, is the story around the lease conversations the retail REIT is having right now. For example, during Federal Realty's third-quarter 2020 earnings conference call, CFO Dan Guglielmone noted that a Marshalls (NYSE: TJX) store was moving into a location once occupied by Bed Bath & Beyond (NASDAQ: BBBY). Marshalls will be paying more rent than the previous tenant, which is good, but the really intriguing thing is that the store isn't new; it's moving from a competitor's property. In effect, the retailer is upgrading its location. There's more such deals in the pipeline, too, according to the REIT.
That speaks to the desirability of Federal Realty's portfolio, as well as the fact that, as the old real estate saying goes, location, location, location is the most important thing.
This too shall pass
Federal Realty isn't telling investors everything is great. In fact, it's stated it expects occupancy to fall into the high 80% range before things start to improve again. But even that's not enough to dull the long-term view here. This REIT owns a carefully curated collection of properties, and the desirability of those assets won't be tarnished by COVID-19 headwinds. If anything, they're likely to get even more desirable. With Federal Realty's stock still lower by nearly 28% so far in 2020 and its yield a historically generous 4.7%, investors looking for a well-positioned retail REIT should take a closer look today.