Updated March 11, 2021 by Bob Ciura
When it comes to dividend growth stocks, the Dividend Aristocrats are the crème de la crème. These are stocks in the S&P 500 index with dividend increases for more than 25 consecutive years. In addition, the Dividend Aristocrats must meet certain market capitalization and liquidity requirements.
It is relatively difficult to become a Dividend Aristocrat, which is why there are only 65 of them. With that in mind, we’ve made a full list of all 65 Dividend Aristocrats. You can download your copy of the Dividend Aristocrats List along with key metrics such as price / earnings ratios and dividend yields by clicking the link below:
At the same time, Real Estate Investment Trusts (REITs) seem to be a matter of course for the Dividend Aristocrats. REITs must distribute at least 90% of their earnings to shareholders, which results in steady dividend growth for the asset class, provided earnings grow over time.
Still, there are only 3 REITs on the Dividend Aristocrats’ list, including the Federal Realty Investment Trust (FRT). The reason for the relative lack of REITs in the Dividend Aristocrats Index is mainly due to the high payout requirement of REITs. It is difficult to increase dividends year after year when the bulk of income is paid out as it leaves little room for error.
Federal Realty has a very impressive dividend history, especially for a REIT. Federal Realty has increased its dividend for 53 straight years, which also makes it a dividend king. This article discusses the only REIT on the list of Dividend Aristocrats and Dividend Kings.
Federal Realty was founded in 1962. As a real estate investment trust, Federal Realty’s business model is to own and rent real estate. It uses a significant portion of its rental income, as well as outside financing, to purchase new real estate. This helps create a “snowball” effect of increasing income over time.
Federal Realty mainly owns shopping malls. However, it also deals with the redevelopment of multi-purpose properties, including retail stores, apartments, and condominiums. The portfolio is highly diversified in terms of tenant base. Federal Realty has a high quality tenant portfolio.
Source: Investor Presentation
The trust’s investment strategy is to target densely populated, affluent communities with high demand for commercial and residential real estate. This strategy has resulted in strong growth in recent years.
2020 has been a very difficult year for Federal Realty and the entire REIT group as the coronavirus pandemic led to store closings across the country. Federal Realty reported fourth quarter earnings on February 11th, 21st. FFO per share was $ 0.99, a significant decrease from $ 1.58 for the year-ago quarter. Total revenue was $ 219.5 million compared to $ 239.1 million in the year-ago quarter. As of December 31, 2020, 92.2% of the portfolio was let.
Despite the sharp decline, there were some positive signs. The company sold three properties in the fourth quarter for combined gross proceeds of $ 170 million. In the fourth quarter, they also signed 103 leases for 468,901 square meters of retail space, which shows a leasing volume at pre-COVID levels. Meanwhile, FRT issued $ 400 million in green bonds and ended the quarter with $ 798 million in cash and $ 1.8 billion in total cash.
Prior to 2020, Federal Realty’s funds-from-operations had not decreased year-over-year at any point in the past decade. This is an impressive feat given that the trust operates in the highly cyclical real estate sector.
While the growth numbers haven’t always been impressive, the simple fact that it has such a consistent track record of security and stability when it comes to funds-from-operations and dividends per share makes it one of the most sought-after REITs out there.
Federal Realty’s future growth will be comprised of continued higher rental rates on new leases and its impressive development pipeline driving the expansion of its asset base. It is expected that margins will continue to increase slightly as parts of the portfolio are redeveloped and sales in the same center continue to increase.
With the economy emerging from the COVID-19 crisis, we expect the results to support the long-term thesis for Federal Realty as the NOI continued to grow in the same business and occupancy remains robust. The industry has seen some high profile bankruptcies despite Federal Realty being largely immune.
Competitive advantage and recession performance
One way REITs gain a competitive advantage is by investing in portfolios of the highest quality. Federal Realty has done this by focusing on affluent areas of the country where demand exceeds supply. In this way, the cash-based rollover growth can continue to grow over time. It owns properties in the most desirable areas and tenants are willing to pay more to get access to the best of consumers.
Federal Realty benefits from a favorable economic environment with high occupancy and the ability to increase rents over time.
Another competitive advantage for Federal Realty is a strong balance sheet. The Trust’s senior unsecured debt is rated A- by Standard & Poor’s, which is a solid investment grade rating and a high rating for a REIT. A strong balance sheet helps keep borrowing costs down, which is critical to the REIT business model.
These competitive strengths allowed Federal Realty to do well in the last recession. Federal Realty’s FFO during the Great Recession is shown below:
- 2007 FFO per share of $ 3.63
- 2008 FFO per share of $ 3.87, up 6.6%
- 2009 FFO-per-share of $ 3.87 (flat)
- 2010 FFO per share of $ 3.88, up 0.3%
- 2011 FFO per share of $ 4.00, up 3%
The FFO has remained stable or increased in each year of the recession. This was a remarkable achievement and speaks volumes about the strength of the business. We expect Federal Realty to do well in the next downturn, but we note that growth will certainly slow down over such a period. Federal Realty is likely to be a net acquirer in the next downturn thanks to its strong balance sheet to drive future growth.
Valuation and expected return
Based on expected FFO per share of $ 4.54 for 2021, Federal Realty stock trades at a price-to-FFO of 23.7. Investors can think of this as value for money.
Federal Realty appears overvalued on a valuation basis. Our fair value estimate is a P / FFO ratio of 15, which implies significant downside due to the high current P / FFO ratio.
Therefore, if the P / FFO ratio drops from 23.7 to 15, the future rate of return could be reduced by -8.7% per year over the next five years. FFO per share growth is expected to be 12% per year plus 4% dividend yield, giving an expected total return of 7.3% per year.
The current dividend yield of 4% is a relatively low yield for a REIT. However, Federal Realty helps make up for that with strong dividend growth and a flawless track record. It has increased its dividend for 53 straight years.
Dividend growth has slowed in recent years as Federal Realty pays less of its FFO per share in distributions. We anticipate that growth will return to past levels in the future as Confidence has seen ups and downs in its payout growth rate but keeps climbing higher.
Investors flock to REITs for dividends, and with high returns across the asset class, it’s easy to see why they’re so popular with high-income investors.
Federal Realty doesn’t have a high dividend yield, especially for a REIT. This is because the stock is consistently trading for a relatively high valuation. However, high-quality companies tend to have above-average ratings.
That said, Federal Realty is a good choice for dividend investors, and we rate the stock as held based on its impressive dividend history.
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