There's an old Wall Street saying that trees don't grow to the sky, basically warning that good things always come to an end. That's important to keep in mind when you invest, because you want to own stocks that can handle the bad times as well as the good ones. One name that stands out for weathering market storms is Federal Realty (FRT). Here's why conservative dividend investors should love it.
A very tough year
The pandemic upended the market in 2020, sending the S&P 500 Index into a quick bear market. The retail sector was hit particularly hard, given that the government effectively shut large swaths of the economy. Social distancing added further complications for stores. Federal Realty, a real estate investment trust (REIT), was right in the thick of it, given that its strip malls and mixed-use developments all have material retail components.
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At one point it was collecting less than 70% of the rents it was owed. That's a terrible number, and completely unsustainable. But management was comfortable with the quality of the assets the company owns. It not only maintained its dividend, but actually made a token increase. The REIT is fully aware of how important a consistent and growing dividend is to its shareholders. At this point, rent collections are well north of 90%, and the pandemic hit is basically in the rearview mirror.
But this outcome shouldn't be all that shocking. Federal Realty has increased its dividend annually for 54 consecutive years. That makes it a highly elite Dividend King. But step back and think about that time period and how many major negative market events transpired. The list includes, in reverse order, the pandemic, the 2007-to-2009 financial crash, the dot-com bust, the late 1990s Asian financial crisis, and many more, going all the way back to the OPEC oil embargo. This company is a survivor.
The foundation matters
The core of Federal Realty's portfolio is the lowly strip mall, which is a boring asset class but one that is at the center of everyday life. For example, roughly 75% of the REIT's properties include a grocery store. Core tenants include small, regularly visited shops like hair salons, restaurants, and dry cleaners. On top of this, the company is highly selective. To put a number on that, it only owns around 100 centers, but they are in some of the best markets and best locations in those markets. It also takes a conservative stance with its balance sheet, earning investment-grade credit ratings.
It's built to handle adversity. In fact, in the midst of the 2020 downturn, management was fielding calls from retailers that were looking to upgrade to Federal Realty properties from nearby locations. That's how well positioned the REIT's portfolio is.
But here's the really interesting thing: In early 2021, management announced the acquisition of a handful of properties, buying while the market was in disarray. CEO Don Wood noted during Federal Realty's second-quarter 2021 earnings conference call: "I think there was a window. And I think we jumped through that window during COVID." But that's something it was only able to do because of its strong industry position and financial strength.
FRT data by YCharts.
These new properties offer opportunities for internal investment and, thus, growth in the years ahead. Simply put, it's coming out of the pandemic a stronger company. However, this shouldn't be seen as a one-off event. The next downturn will likely present similar opportunities for Federal Realty to strengthen its business. It's what great companies do.
Be ready
Federal Realty's stock fell nearly 50% during the worst of the market meltdown in 2020. The dividend yield spiked to a very attractive 6% at one point. While the stock has gained back much of that lost ground, lowering the yield, long-term dividend investors should put this REIT on their wish lists. When the next market downturn comes (and it will eventually come), putting some money into this retail landlord could be a very attractive option. The chances are it won't just survive the next market crash, but will use it as an opportunity to get even stronger.
