Federal Realty Investment Trust: A 'Rockefeller' REIT

| About: Federal Realty (FRT)
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John D. Rockefeller once said "The only thing that gives me pleasure is to see my dividend coming in." Mr. Rockefeller was a legendary investor and, by all measures, a successful tycoon. It stands to reason that something that made him happy should also make us as investors happy.

In order for a company to consistently pay a dividend and consistently increase their dividend (a "Rockefeller" company), the company must have the following attributes:

  • A sound business strategy,
  • The ability to implement that strategy,
  • The financial wherewithal to finance the implementation and ensure business continuity going forward.

Federal Realty Investment Trust (NYSE:FRT) meets all of these considerations and could, therefore, be considered a "Rockefeller" company. Before I get into why FRT is a "Rockefeller" REIT, I would like to summarize Wednesday's earnings release (please note my charts and data were created prior to the release):

  • Quarterly FFO of $62.1 million, or $0.97/sh -3.9% YOY and -3.9% sequentially. Missed avg estimate of $0.98,
  • Annual FFO of $251.6 million, or $4.00/sh +3% YOY
  • Same-center property operating income in fourth quarter 2011 increased 3.6%
  • For the year, same-center property operating income in 2011 increased 1.8%,
  • The overall portfolio was 93.4% leased, +10bps sequentially and -50bps YOY.
  • On a comparable space basis, the Trust leased 231,394 sq ft at an average cash-basis contractual rent increase per square foot of 10%. For all of 2011, Federal Realty signed 339 leases representing 1.3 million square feet of comparable retail space at an average cash-basis contractual rent increase per square foot of 9%, and 20% on a GAAP-basis.
  • FRT kept the dividend at $0.69 per share,
  • Debt as a percent of capitalization increased 7% sequentially and 1.6% YOY to 63%. Net real estate increased 13% sequentially and 15% YOY.

The company provided the following 2012 FFO guidance: $4.19-$4.25 up from $4.16-$4.22.

All in all, decent numbers with occupancy stabilizing and same store results continuing their positive trend. Rental increases have also continued, which I view as a positive sign for future performance. The tick up in debt is not a cause for concern at this juncture.

Back to the analysis.

Federal Realty Investment Trust specializes in the ownership, management and redevelopment of high-quality retail assets, including shopping centers and urban, mixed-use properties. Federal Realty's portfolio contains approximately 19.3 million square feet located primarily in strategically selected metropolitan markets in the Northeast, Mid-Atlantic, and California.

The "Rockefeller" attributes:

A sound business strategy

Federal Realty's primary business objective is to own, manage, acquire and redevelop a portfolio of high quality retail properties that will:

  • protect investor capital;
  • provide increasing cash flow for distribution to shareholders;
  • generate higher internal growth than our peers; and
  • provide potential for capital appreciation.

According to Fitch Ratings:

FRT has consistently followed a strategy of operating a high-quality retail real estate portfolio with assets located in infill locations with strong demographic characteristics, as opposed to engaging in speculative development in less mature retail markets. The company maintains a long-term hold strategy with respect to its properties and has successfully grown rent revenues through redevelopment activity. This strategy has enabled the company to produce consistently strong operating performance, which, while weakened slightly during the downturn, is stronger than that of the retail real estate market generally.

The ability to implement that strategy

Federal Realty accomplishes their objective through acquiring and owning properties that are generally located in some of the most densely populated and affluent areas of the country. These strong demographics help their tenants generate higher sales, which has enabled them to maintain higher occupancy rates, charge higher rental rates, and maintain steady rent growth, all of which increase the value of their portfolio.

FRT has the greatest concentration of assets in the nation's top 20 markets which comprises 41% of retail expenditures in the United States:

Source: BAML

A result of their regional/demographic focus their average cash basis rent per square foot is 65% higher than their peer group.

Source: Company Reports

The company's top tennants are:

  • Bed Bath and Beyond (NASDAQ:BBBY) a $14B maket cap retailer at 2.62% of annualized base rent,
  • Ahold (AHONY.PK) a $15B market cap grocer at 2.33% of annualized base rent,
  • TJX Companies (NYSE:TJX) a $25B market cap retailer at 2.08% of annualized base rent,
  • The Gap Inc. (NYSE:GPS) a $11B market cap retailer at 1.82% of annualized base rent, and
  • CVS Corp (NYSE:CVS) a $56B market cap drug retailer at 1.63% of annualized base rent.

The financial wherewithal to finance the implementation and ensure business continuity going forward

The financial wherewithal to finance the implementation and ensure business continuity going forward is going to be the outcome of profitably utilizing assets and selectively growing the business as well as keeping a financial profile that is conservative enough to make it through difficult periods (such as the one we just went through) and the ability to attract new capital. Federal Realty has shown they have the financial wherewithal.

First a snapshot of key financial data:

Peer Comparison:

As Federal Realty is among (and helps set) the "gold standard" of REITs, it commands a premium in many metrics versus its peer group.

A snapshot of equity metrics:

Source: Bloomberg and BMO

Okay, they do trade at a premium to peers ((NYSE:KIM), (NYSE:REG), (NYSE:DDR) and (NYSE:SKT)), and yes, their dividend yield is below 3%, but over the last year, the company has returned greater than 20%. Over the last six years, the dividend has grown at a CAGR of greater than 3%. As well, the dividend yield may not hit a 5% hurdle rate used by many, but a company with a 50 year dividend history and 44 years of increased dividends is, to say the least, a company you can count on to "see your dividend coming in".

That "Rockefeller" moment:

Federal Realty has paid quarterly dividends to its shareholders continuously since its founding in 1962, and has increased its dividend rate for 44 consecutive years, the longest record in the REIT industry. Fifty years of dividend and 44 consecutive years of an increasing dividend makes Federal Realty one of only a handful of companies with this enviable track record.

In conclusion, Federal Realty Investment Trust is a "gold standard" REIT with a conservative financial profile, a sound business plan and a history of successful implementation of that plan. The ability of the company to weather many storms while still being able to sustain (and increase) their dividends truly makes this Federal Realty a "Rockefeller" REIT.

Disclosure: Long DDR preferreds.