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How Federal Realty Investment Trust Is Surviving While Retail Struggles

The past year has been tough for retail. High-profile bankruptcies included Payless ShoeSource and Shopko; Fairway Markets recently filed Chapter 11, as did Pier 1 Imports. Outplacement firm Challenger, Gray, and Christmas, which tracks announced job cuts, reported that retailers announced the most cuts of any industry in 2019. What does this mean for retail real estate investment trusts (REITs) like Federal Realty Investment Trust (NYSE: FRT)?

Image source: Getty Images.

Federal Realty Investment reported a strong 2019

Federal Realty had a great 2019, earning $4.61 per share versus $3.18 a year earlier. Funds from operations (FFO) per share, the equivalent of earnings for a REIT, dipped from $6.23 a share in 2018 to $6.17 in 2019 -- but the decrease was due to an acquisition-related charge. Absent that charge, FFO per share would have been $6.33.

Federal Realty has managed to grow FFO every year for the past 10. Donald C. Wood, president and CEO of Federal Realty, said on the company's fourth-quarter conference call:

So, for the 10th year in a row, FFO per share was higher than the previous year, excluding of course last quarter's Kmart real estate acquisition charge to the income statement for carrying purposes. And barring some unforeseen collapse, 2020 will be the 11th year in a row. ... Please let that sink in.

Retailers in general had problems in 2019, but Federal Realty managed to escape them. Part of the reason for that is the company's strategy.

Federal Realty's strategy helps mitigate some of the problems affecting retail

How can Federal Realty manage to consistently grow FFO when many other retail REITs are struggling to do the same thing?

First, Federal Realty tends to stick to dense, urban areas (and their suburbs) primarily on the coasts. Unless its more geographically diverse peers, the company is concentrating on the biggest cities on the Eastern Seaboard and the West Coast. These areas tend to have more traffic, more affluent customers, and a tighter real estate market.

Second, mixed-use properties allow the company to diversify its risk. The trend of mixing residential units with retail and office seems to be working out, and more of the tenants will be more experiential (think services like health and beauty, restaurants, hotels, and gyms) and less retail. Experiential services are largely immune to the Amazon effect that has made life miserable for many bricks-and-mortar retailers. Mixed-use also helps commercial tenants because of the natural foot traffic from those that live in the complex.

Image source: Federal Realty Trust.

Growth in 2020 will be more modest but should pick up in 2021

Going forward, Federal Realty noted on the call that construction costs are increasing, which has lowered some of the expected returns on its redevelopment portfolio. The redevelopment portfolio sometimes includes full-scale tear-downs and rebuilds of a shopping complex. The higher construction costs have eaten into the expected returns for some of these projects. Most of the redevelopment portfolio will come online in 2021. So growth going forward might be more modest in 2020 and then pick up in 2021. That said, the company believes that FFO will still rise in 2020, so the dividend appears safe -- Federal Realty has raised its divided every year over the past decade, and the stock currently yields 3.3%.

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Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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