Federal Realty Investment Trust: The Only REIT Dividend King

Possessing competitive advantages in real estate is tricky because the sector is so very competitive. However, the strategies that FRT uses to acquire and develop its properties have proven highly successful over time and one key way to quantify that is via its average rent numbers.

FRT Peers

Source: Investor roadshow presentation

FRT’s average cash rent in 2017 was roughly 60% higher than the peer group average and head-and-shoulders above second place. The reasons for this have been discussed but they include the demographics of the areas where FRT chooses to compete and its property acquisition and development strategies.

There is no reason to doubt the continuation of this trend going forward and that is certainly a competitive advantage for not only FRT, but its shareholders. This company has proven to be one of the best in its sector over the long term.

Speaking of demographics, this chart sums up why FRT is able to charge more than everyone else. It finds properties with superior demographics and exploits those opportunities to the fullest.

FRT Households

Source: Investor roadshow presentation

In this chart, the farther a company is towards the upper right, the better, and FRT is about as far as one could get. It shows that median household incomes are very high where FRT chooses to operate and that population density is very high as well. This is a big reason why FRT can charge more than its competitors on average, providing it with that pricing advantage. It has used this strategy to grow its portfolio to more than 24M square feet and sports an occupancy rate of 95%.

The company’s exposure to the top 20 US markets is also terrific at 77.1% versus its peer average of just 53.9%. FRT’s competitive advantage is that it knows exactly where the most desirable properties are located and works tirelessly to develop them.

Even with its enormous size FRT has a tremendously diversified portfolio of customers. No single customer is responsible for more than 3% of its total annualized base rent and that means that should one or more of them suddenly cease operations, FRT isn’t going to be put into any sort of economic hardship as a result. Most of its customers are less than 1% of its total portfolio and that diversification will go a long way during the next economic downturn.

Speaking of downturns, FRT’s FFO-per-share during and after the Great Recession are below:

  • 2007 FFO-per-share of $3.63
  • 2008 FFO-per-share of $3.87 (6.6% increase)
  • 2009 FFO-per-share of $3.87 (flat)
  • 2010 FFO-per-share of $3.88 (0.3% increase)

The company’s property portfolio and rental income actually grew every year during this time frame, a testament to FRT’s superior strategy. Operating margins did fluctuate, however, producing flat FFO in 2009 but all things considered, this is an exemplary performance during the worst recession in many decades.

All of the things that FRT does well allow it to perform like this and, importantly, become an opportunistic acquirer during tough economic times, setting up long term future growth.

Valuation & Expected Returns

ValueLine analysts expect FFO-per-share of $6.20 in 2018. As a result, the stock trades for a price-to-FFO ratio of approximately 19.1. In the past 10 years, FRT held an average price-to-FFO ratio of 22.3, which indicates that the stock is slightly undervalued.

FRT Valuation

Source: ValueLine

FRT has put together a track record of superior returns against its peer group over the long term and this is why it is widely considered one of the best REITs in the market.

FRT FFO

Source: Investor roadshow presentation

This chart shows the company’s FFO per share growth since 2005 and apart from the enormous outperformance overall, FRT managed to see just a small blip in its FFO during the Great Recession while others struggled mightily and quite frankly, haven’t recovered fully. This is an important piece of the total returns picture as you know that when you own FRT, even a deep recession isn’t going to wreck your returns for years to come.

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