Real Estate Investment Trusts (REITs) are the best and easiest way for income investors to profit from rental properties without any of the hassle, paperwork, or illiquidity that goes with personally owning real estate.
Of course, now that interest rates are rising for the first time in nearly a decade, many investors are concerned about whether it’s a good time to invest in this high-yield sector.
Fortunately, the highest-quality REITs have proven track records of growing in all manner of economic and interest rate environments.
None more so than Federal Realty Investment Trust (FRT), which is one of America’s oldest REITs and has grown its dividend every year since 1967 (49 years and counting) at a very impressive average annual rate of 7.4%.
In fact, Federal Realty is the only real estate company in the dividend aristocrats list here.
Let’s take a closer look at Federal Realty to see just if this company deserves to be considered one of the world’s best high dividend stocks and a worthy candidate for a diversified income portfolio.
Business Overview
Founded in 1962 in Rockville, Maryland, Federal Realty is one of America’s (and the world’s) oldest REITs. It has traditionally specialized in high-quality, neighborhood shopping centers anchored by grocery stores and located in large, highly affluent markets.
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Source: Federal Realty Investor Presentation
Federal Realty owns 98 properties totaling 23 million square feet. However, the biggest growth potential for the REIT lies in premium mixed usage retail properties, in which retail is combined with residential, office, and hotel components and rented to high-end retailers that are least at risk of being disrupted by e-commerce from giants such as Amazon (AMZN).
That’s why Federal Realty also owns over 1,800 premium apartments in some of America’s fastest-growing and strongest rental markets.
Business Analysis
When it comes to well-managed, long-term focused REITs with a history of consistent dividend growth, Federal Realty is literally the best in the REIT industry.
In fact, its record of 49 consecutive years of unbroken annual payout growth means that in 2018 the company will become the first and only REIT dividend king.
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Federal Realty has been able to achieve such consistent performance in all sorts of economic and interest rate environments (including interest rates of 22%) thanks to its conservative culture and triple net lease business model.
Specifically, that means that Federal Realty’s tenants pay all taxes, insurance, and maintenance costs, and Federal merely sits back and collects its high-profit rent, which is under very long-term leases (average remaining lease is 8 years).
That creates highly consistent and recurring funds from operation (FFO), which ultimately pays the company’s highly secure and steadily growing dividend.
Of course, given the fact that the REIT industry is highly commoditized, the fact that management has been able to build several key competitive advantages is also key to the long-term success story.
In the case of Federal Realty, its competitive advantage is due to management’s multi-pronged long-term growth strategy:
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Management believes this five-part strategy will enable the REIT to achieve 5% to 7.25% annual FFO growth over the long-term.
The first part involves owning properties located in the densest and most affluent areas of the country, to maximize the prosperity of its tenants:
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In fact, over three quarters of the company’s properties are located in these core markets.
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The second quality factor is management’s disciplined approach to maintaining and improving its properties, in order to attract more premium tenants and achieve higher lease rates.
Management has been able to achieve impressive 8% to 9% returns on investment for this kind of “tactical redevelopment†historically. That’s because, combined with the premium locations of its properties, its more upscale focus has allowed it to achieve, by far, the best rental rates in its industry.
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Even better? Federal Realty has been able to maintain high occupancy (95%) with these high leases, and even grow them at impressive rates, far quicker than its peers.
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More important is that this strong increase in leases is a long-term trend, not just the result of a strengthening economy over the past five years.
As you can see below, management has been able to grow its rental leases by double the rate of the industry average over the last two decades.
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And given that the new leases signed in the past year have averaged $35 per square foot, this impressive trend is likely to continue for some time – even despite the current turmoil in brick-and-mortar retail.
Combined with disciplined new property acquisitions, these steadily rising rental rates have allowed Federal Realty to post strong and consistent sales increases in what is otherwise a slow growth market.
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Source: Simply Safe Dividends
Next, management uses strong cost discipline and growing economies of scale to convert that sales growth into steady and even improving margins and returns on capital.
