Federal Realty Investment: A Top-Of-Class REIT With A 4.3% Yield (NYSE:FRT)

Federal Realty Investment Trust (NYSE:FRT) is a top choice for a passive income investors that value visibility of FFO and dividend growth as well as long-term appreciation potential.

Federal Realty Investment is one of the oldest U.S.-focused real estate investment trusts in the United States that has delivered consistently strong results for shareholders in terms of FFO growth, independent of the underlying economic environment.

Federal Realty Investment has a proven track record over more than half a century and the trust is capable of delivering dividend growth even during a recession. Federal Realty Investment presently pays a stock yield of 4.3% and the stock has a reasonable FFO multiple.

My Rating History

Federal Realty Investment is and has been a core investment holding in my passive income portfolio for quite a while. The main purpose of holding Federal Realty Investment in my investment portfolio has been the safety of the trust’s dividend. Federal Realty Investment has considerable potential for FFO growth in the years ahead and the dividend should continue to go up as well.

Well-Diversified, Mixed Property Portfolio Spanning The United States

Federal Realty Investment is a well-managed REIT that looks back on decades of portfolio and FFO growth. The trust was officially started in 1962, seven years before dividend champ Realty Income Corp. (O) was founded.

Federal Realty Investment is focused on a mixed-property portfolio that includes both commercial as well as residential units. At its core, Federal Realty Trust’s real estate portfolio consists of 102 shopping centers that were leased to more than 3,000 commercial tenants, and about 3,100 residential units.

The trust’s main operating focus is on major metropolitan cities such as New York, Philadelphia, Miami and other urban centers that are subject to positive migration flows and have above-high household incomes. Strong income metrics tied to major metropolitan areas indicate potential for above-average rental growth.

Federal Realty Investment has distinguished itself primarily due to its ability to grow its FFO at above-average rates, relative to the competition, primarily due to its focus on fast-growing cities with above-average household incomes.

Cities like Boston, Miami or New York offer only a limited supply of new commercial and residential development space which in turn benefits landlords like Federal Realty Investment, in both the commercial and residential part of its business.

Federal Realty Investment has managed to grow its FFO throughout major economic crises, like the Great Recession in 2008 and the Covid-19 pandemic in 2020.

In terms of FFO growth, Federal Realty Investment has outperformed other shopping center-focused REITs like Kimco Realty Corp. (KIM) which I also have a favorable opinion of.

Growth In FFO And Well-Covered Dividend

The commercial REIT showed healthy underlying FFO growth in 2023 as real estate market proved to be resilient and rental income continued to go up.

Federal Realty Investment produced $134.9 million in FFO from its real estate assets in 4Q-23, reflecting a YoY increase of 5%. On a per share level, this translated into an equally-respectable 4% YoY growth rate.

The reason why I think that FRT is a particularly suitable investment for passive income investors, besides its FFO growth, is the moderate pay-out ratio which ensures that the trust can continue to raise its dividend in 2024.

The pay-out ratio, based on FFO, stood at 67% in 4Q-23 and 66% in 2023. Realty Income, which many income investors may use as a reference point given its long dividend growth history as well, has a pay-out ratio of 76%, so from this angle, I would actually say that FRT offers passive income investors a much higher margin of dividend safety than Realty Income.

The real value with an investment in Federal Realty Investment is the implied potential for durable dividend growth. The trust raised its dividend for more than half a century and the low FFO-based pay-out ratio gives Federal Realty Investment considerable room to hand a boatload of dividend increases to passive income investors in the future. Those dividend raises, obviously, are much more valuable in an inflation environment.

According to the last inflation update, consumer prices rose 3.2% in February. In such an environment, dividend-paying stocks like FRT become even more valuable, in my view, and this should also be true for investors that are on some kind of fixed-income.

What Is A Potential Problem For Federal Realty Investment?

The commercial REIT has exposure to the U.S. office market which is known to struggle from a variety of factors including pressure on rents and vacancies.

About 10% of the trust’s annualized base rent comes from Federal Realty Investment’s mixed-use office portfolio. The headwinds in the office market are serious and have led W. P. Carey Inc. (WPC), for instance, to rush to spin off its office properties in order to get them off the balance sheet. A deterioration in occupancy, which as of September 30, 2023 was 96%, must therefore be expected which may impact the trust’s overall real estate performance.

Guidance And FFO Multiple

Federal Realty Investment’s guidance for 2024 implies low single digit growth in FFO YoY: The trust sees $6.65-6.87 per share in FFO in 2024 which reflects, based on a stock price of $101, a 15.0x FFO multiple.

Realty Income, which has an equally impressive, long-lasting dividend growth record as well as a retail-focused real estate portfolio, sells for 12.6x FFO at the present time.

Kimco Realty, another shopping center REIT, is selling at 12.5x FFO, but has not as clear and long-term of a dividend record as Federal Realty Trust. Kimco Realty’s LTM FFO pay-out ratio was 59%. Despite the higher price tag for Federal Realty Investment, I think that FRT is a solid long-term Buy here.

Office Exposure, Risks And Other Considerations

In the long run, Federal Realty Investment has proven that it is reliable passive income investment, but there are risks as well. One key risk area is represented by the office portfolio, which is relatively small to the trust’s other commercial and residential real estate assets, but it represents risk nonetheless as the office market is weakening.

Soft leasing activity and higher vacancies in the office sector in 2024 may therefore be a headwind to the trust’s FFO as well as margin of safety.

My Conclusion

Federal Realty Investment is a well-managed shopping center-focused REIT that has delivered robust FFO growth for a very long period of time, including the fourth quarter of 2023.

As one of the oldest REITs in the country, the trust has proven itself in many different economic environments during which Federal Realty Investment also has been able to raise its dividend.

Federal Realty Investment provides a solid dividend for passive income investors, in my view, with the yield presently standing at 4.3%.

Though Federal Realty Investment is not selling for a bargain FFO multiple and is more expensive than Realty Income and Kimco Realty, I think that FRT has a solid place in a passive income investors’ portfolio.