Federal Realty: A "King" Among REITs

12/14/2020 5:00 am EST

Focus: REITS

Bob Ciura

Senior Vice President, Sure Dividend

Dividend Kings are stocks that have shown 50+ years of rising dividend. Federal Realty (FRT), a real estate investment trust is a one of our top-ranked "Kings" based on expected annual returns through 2025, suggests Bob Ciura, contributing editor to Sure Dividend.

This is a difficult time for retailers, as competition is heating up from e-commerce players such as Amazon (AMZN) and many others.

Mall traffic is declining, which has put pressure on many brick-and-mortar retailers. Conditions for retail real estate have become even more challenging due to the coronavirus, which has forced many stores to close.

That said, Federal Realty continues to generate positive FFO and pay dividends to shareholders, thanks to a high-quality and diversified property portfolio.

Competitive advantages include its superior development pipeline, its focus on high-income, high-density areas and its decades of experience in running a world-class REIT. These qualities allow it to perform admirably, and continue growing even in a recession.

Federal Realty reported Q3 earnings on 11/5/20. FFO per share came in at $1.22, down sharply from $1.43 in the year-ago quarter. Total revenue came in at $208.2M, down from $233.2M in the year-ago quarter. Despite the steep declines, there were some positive signs.

Rent collections continued to trend positively with 85% of total Q3 rents collected. During the third quarter FRT also signed 101 leases for 481,105 square feet of retail space, demonstrating leasing volumes at pre-COVID levels. Federal Realty also recently increased its dividend for the 53rd year in a row.

Based on expected 2020 FFO-per-share of $4.55, Federal Realty stock trades for a price-to-FFO ratio of 19.8. Our fair value estimate for Federal Realty is a price-to-FFO ratio (P/FFO) of 15.

We view Federal Realty stock as overvalued, and a declining valuation multiple will reduce shareholder returns. However, expected annual FFO-per-share growth of ~5.9%, plus the 4.7% dividend yield lead to expected total annual returns of 10.4% per year over the next five years.

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