Federal Realty Investment Trust (NYSE: FRT) only owns a collection of around 100 or so strip malls. But, despite the modest size of its portfolio, it's created an incredible record of success that none of its peers, and in fact few other real estate investment trusts (REITs), come close to matching. Here is why I bought this REIT and why I'm not planning to sell it anytime soon.
The big one
I would be lying if I didn't admit that Federal Realty's dividend was what drew my attention to this REIT. That said, there are two different factors here. First, the dividend has been increased annually for 54 consecutive years. That makes the REIT a Dividend King, a category that includes only around 30 companies. I'm not aware of any REIT with a longer dividend streak. Federal Realty clearly knows how to get through tough times while continuing to reward investors via a growing dividend.
Then there's the dividend yield, which is really what got my attention. I jumped aboard during 2020, when the stock had plunged due to the impact of the world's efforts to contain the spread of the coronavirus. At that point, the yield was near its highest point in a decade, and it looked attractive to me. It was an uncertain time, but given the long-term dividend record, I was confident management would find a way to muddle through and keep the dividend intact.
The stock has since recovered most of the lost ground, and the dividend did, indeed, keep going up, so my call was correct. That said, the current 3.4% dividend yield isn't as attractive as it was just a short while ago. However, now that I'm in the door, I'm not selling to capture a quick gain -- I want to stick around for a very long time.
Some of the other great things here
While it was the dividend that really attracted me to Federal Realty, that record is the result of a long string of management decisions. And it's those underlying choices that really drive my decision to make this REIT a long-term hold.
For example, Federal Realty has a fairly modest portfolio when compared to others in the strip mall space. However, it is one of the largest companies by market cap. That's because it has been highly selective in what it owns. It specifically looks to buy properties in and around major metropolitan areas with large, wealthy populations. These are areas where retailers want to be located. And while it has an entrenched position in many key markets, it still has opportunities to grow, noting that it used the COVID-related uncertainty to buy into the Phoenix market, expanding its reach to a new area.
In addition to buying in the best locations, the landlord has long focused on upgrading the assets it owns to make them leaders in the areas in which they compete. This includes a collection of large mixed-use developments that have been built up over time but also things as simple as modernizing more mundane strip mall locations.
Such capital investment provides internal growth opportunities and keeps the portfolio fresh and up to date. But the real draw here is that Federal Realty will be able to grow its business even during times when Wall Street is volatile.
A key reason for that is the REIT's investment-grade-rated balance sheet. This allows the company access to cheap capital that it can put to work improving its assets. But having a solid financial foundation also means that Federal Realty can survive difficult times in relative stride because it can access capital markets even during worrying times. That is also what allows it to use downturns to opportunistically buy new properties.
So there are multiple benefits here. The REIT's financial strength was on display in 2020 and in early 2021 but is another of the core reasons to keep this name in my portfolio for a very long time.
A multifaceted gem
There's always something that makes an investor "pull the trigger" and buy a stock. For me with Federal Realty, it was the sharp rise in the dividend yield during the early days of the coronavirus pandemic. However, the incredible dividend record backing that yield, the focus on the best-of-the-best locations, built-in growth opportunities, and a solid financial foundation are the real reasons to love this well-run strip mall REIT. And they are why I'm planning to never sell this stock.