1 cheap stock to buy now
The market has trended higher lately, but real estate investment trusts (REITs) Federal Real Estate Investment Company (FRT) is still down almost 30% from its early 2020 highs. Looking a bit further, it is around 45% below the high reached in 2016. There is good news and bad news here – but if you’re looking for a cheap stock as the broader market hits new highs, Federal Realty still looks like it’s in bargain territory.
Claim to fame
One of the most incredible things about Federal Realty is that it has increased its dividend every year for over five decades without fail. This places the real estate investment trust in Dividend Aristocrat territory. You don’t create this kind of record dividend by accident – it requires a long-term commitment to returning value to investors through cash distributions and, more importantly, an effective strategy and management team. Fifty years is a long time, and Federal Realty has skillfully handled the ups and downs and management transitions along the way.
This REIT is therefore not a blind company or a young upstart trying to prove itself. Investors can rest assured that, based on the story here, Federal Realty is working with your best interests at heart. This can also be seen in its highly targeted real estate portfolio, which includes around 100 shopping centers and mixed-use developments. That’s pretty low considering the company’s long history. However, Federal Realty has long emphasized quality over quantity.
These 100 properties are specifically located in rich and dense areas near major cities. To put some numbers on it, there are an average of 170,000 residents with a household income of around $127,000 per year within three miles of its centers. These are the types of places that can attract customers and tenants. Additionally, its mixed-use developments offer long-term investment opportunities as they are typically built in stages. So there is also growth built into the portfolio.
There is a problem here
So far, there’s a lot to like about Federal Realty, which offers a historically high yield of 4.5%. In fact, the last time performance was this strong was during the 2008-09 recession. This raises the not-so-pleasant question of the US recession that began in February 2020. This downturn was precipitated by the economic shutdowns used to slow the spread of the coronavirus. And in the retail sector, the coronavirus has effectively accelerated the previously slow retail apocalypse that was already hitting this REIT niche.
With non-essential businesses forcibly closed, Federal Realty has struggled to collect all the rent owed to it. In fact, in the third quarter, he was still only receiving 85% of his rent, even after the restrictions were relaxed. While this is a worrying number, it is a big improvement from the levels it suffered at the start of the pandemic. Although the company increased its dividend again in October, this was intended to show its commitment to investors. The REIT’s funds from operations (FFO), which is akin to the profits of an industrial company, reached a very worrying 95% payout ratio in the third quarter.
Times definitely remain tough and there’s not much room for adversity here, but management don’t think the pain is over yet. Isn’t that comforting? Indeed, during Federal Realty’s third quarter 2020 earnings conference call, the CFO specifically stated that occupancy is expected to move from the low 90% zone to the mid-to-high 80% zone before the end of the current slowdown.
This is not good news, but there are signs of hope. Real estate is all about location, location, location, as the old industry adage goes. And Federal Realty has very well located assets. In fact, during the third quarter call, management noted that they were responding to inquiries from potential tenants with nearby locations run by other landlords. In other words, renters are looking to move to better locations and they think Federal Realty properties are in that location, even if it means paying higher rents. This suggests that the real issue right now is finding the weakest existing tenants so Federal Realty can update its list of tenants. Changes like this don’t happen overnight for most retail REITs, so it’s a process. But the fact that Federal Realty is already seeing progress is a very positive development.
The big picture
When you step back and look at the whole story, Federal Realty seems to be on sale for a reason. But given its long and successful history, even conservative dividend investors should still be interested in this REIT. One of the main reasons for this is the fact that Federal Realty is already starting to take advantage of this slowdown to update its list of tenants. Yes, there will likely be tough days ahead in the near term, but if history is any guide, it seems likely to set this REIT up for longer-term success. If you act now, you may choose Federal Realty while others are still bullish on this successful commercial REIT.