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Federal Realty: Getting Paid to Wait

GuruFocus.com
·6 min read

- By Nathan Parsh

Earlier this month, I indicated that I was impressed with W.P. Carey Inc.'s (NYSE:WPC) performance during its most recent quarter. The trust continues to enjoy an extremely high occupancy rate even in the midst of an ongoing pandemic.

Not all real estate investment trusts have fared as well as W.P. Carey, however. Forced temporary store closures have impacted many REITs.


One such name is Federal Realty Investment Trust (NYSE:FRT). Regardless, investors buying shares of the trust may be paid a high dividend as they wait for a full recovery from the Covid-19 pandmeic.

Quarterly highlights

Federal Realty reported third-quarter results on Nov.5. Revenue declined 11.1% to $207.4 million, but was $840,000 better than expected by Wall Street Analysts. Funds from operations, or FFO, decreased 31 cents, or 22%, to $1.12, though this beat estimates by 1 cent. Included in the figure was an $11.9 million charge related to a buyout at one of the trust's properties.

The largest impairment to revenue and FFO results was Federal Realty's ability to collect rent. The trust collected 85% of rent in the third quarter, which was a solid improvement from the second quarter, where just 68% of rent was collected.

Also encouraging was that Federal Realty collected 85% of rent in October, which is included in the trust's fourth quarter. This shows that tenants abilities to pay rent may have stabilized.

Federal Realty has uncollected rent of $76 million so far in 2020. The trust has reached deferred payment agreements with tenants totaling $34 million, with the vast majority due by the end of next year. Federal Realty also agreed to modify certain leases, which will reduce total rent by $21 million.

As of Sept. 30, all of Federal Realty's 104 properties remain open. The occupancy rate was 92.2% and the comparable portfolio was 92% at the end of the quarter, down 80 and 170 basis points from the second quarter of the year. These declines are not entirely unexpected given the number of bankruptcies that have occurred as a result of Covid-19.

Federal Realty's portfolio remains well diversified. The trust's top 25 tenants, which make up around 28% of annual base rents, include companies like Home Depot (NYSE:HD), CVS Health Corp. (NYSE:CVS) and the TJX Companies (NYSE:TJX).

The only property types that account for more than 10% of annualized base rents are restaurants, residential and office. While the restaurant category remains challenged as a result of Covid-19, the impact was not nearly as severe as in the prior quarter as many locations are able to offer limited dining in seating as well as carry out. Of course, this has started to change in certain geographies as additional restrictions are implemented.

One category that has improved has been retail. Based on annualized base rents, almost 97% of retail tenants were also open during the most recent quarter. For context, 92% of properties were open on July 31 and just 47% were in operation on May 1.

While results showed some weakness in the business, there were some bright spots. The trust signed 101 leases for more than 481,000 square feet of retail space during the quarter, comparable to pre-Covidlevels. This is an improvement from the second quarter when the trust signed 65 leases totaling almost 400,000 square feet of retail and office space.

Analysts surveyed by Seeking Alpha expect that Federal Realty will generate $4.55 of funds from operations for the year, which would be a 28% decline from last year. These same analysts do expect a return to growth next year as FFO is pegged at $5.12 in 2021.

Federal Realty ended the quarter with $863 million in cash and cash equivalents on its balance sheet and has additional billion in capital at its disposal. The trust also has no current debt outstanding and just $340 million due by the end of 2021.

Financially, Federal Realty's business looks well positioned to withstand the Covid-19 pandemic. The improved rent collection is also a point in the trust's favor. While results were not as strong as W.P. Carey's, they are solid enough that I find the stock to be attractive.

Dividend and valuation analysis

The trust's high yield and low valuation also contribute to the appeal of the stock.

Federal Realty's current yield is 4.7%, more than 170-basis points above than the stock's average since 2010. The expected payout ratio of 93% for 2020 is higher than the 10-year average payout ratio of 68%, which is something to keep an eye on going forward. I would expect the payout ratio to move closer to its long-term average once a recovery from Covid-19 takes place.

The trust also has 53 consecutive years of dividend growth, qualifying Federal Realty as a Dividend King. There are just 29 other stocks in the market place that have boosted dividends for at least five decades.

Past performance does not guarantee future results, but given the length of the trust's dividend growth streak, it's strong financial position and its usually low payout ratio, I continue to believe that Federal Realty's dividend remains in good shape.

Federal Realty closed Friday's trading session at $89.78, which gives the stock a forward price-FFO ratio of 19.7. This is a higher earnings multiple from when I last looked at the company, but still trades at a discount to the stock's 10-year average price-FFO ratio of 23.4.

Even reverting to a lower than average multiple, say 21 or 22 times earnings, would result in a 6.4% to 11.5% return from the current share price. Add in the dividend yield and investors could be looking at a total return in the double-digit range.

GuruFocus is even more bullish on Federal Realty.

Federal Realty: Getting Paid to Wait
Federal Realty: Getting Paid to Wait

Federal Realty has a GF Value of $118.86 at the moment. That means shares are currently trading with a price-to-GF Value of 0.76, earning the stock a modestly undervalued rating from GuruFocus. If shares of Federal Realty were to trade with their intrinsic value, then the stock could return 32% before even considering the dividend.

Final thoughts

Federal Realty's dividend growth streak is almost unmatched; not just by its peers, but by the market as a whole. The stock's yield remains considerably higher than its long-term average and shares trade below their intrinsic value, using either its 10-year average FFO multiple or the GF Value.

Federal Realty's third-quarter results were again impacted by the Covid-19 pandemic. Even so, the trust saw an improvement in sequential rent collection, which has been sustained through at least the first month of the fourth quarter. All of Federal Realty's properties and 97% of retail annual base rents remain open as of the end of September. Federal Realty is not completely out of the woods yet, but these factors could mean that the worst effects of the Covid-19 pandemic might be behind the trust.

Investors buying today would be paid a high dividend yield as they wait for Federal Realty's business to completely heal from the pandemic. And looking at third-quarter results, that recovery is well on its way to becoming a reality.

Disclosure: The author maintains a long position in CVS Health, Home Depot and W.P. Carey.

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This article first appeared on GuruFocus.