Real estate investment trust (REIT) Federal Realty (NYSE: FRT) doesn’t operate like most of its peers, which grow by acquiring more and more properties. In fact, Federal Realty, despite a market cap of around $8 billion, only owns around 100 assets. They are very attractive assets, however. They make this stock, with an impressive 4.5% dividend yield, a buy for most conservative investors.
From a top-level view, Federal Realty is a property-owning REIT. Its specific focus is on owning strip malls and mixed-use assets. The mixed-use assets are heavy on the retail side of the equation, but also include things like office space and apartments. Overall, Federal Realty has some property diversification in the mix, but it is best to consider it a retail REIT.
Strip malls are the core of the portfolio, with roughly 80% of the company’s properties having a grocery store in them. This is important because grocery stores bring traffic to strip malls, which are basically local, open-air shopping centers. Retail tenants want to be in strip malls that get a lot of customer traffic. But having grocery stores in the mix isn’t enough to set Federal Realty apart from other strip mall owners.
The big difference is that Federal Realty focuses on quality over quantity when it comes to its properties. It only owns around 100 assets, which is pretty small compared to most of its closest peers. However, the REIT states that it has “best in class locations,” which is a bold claim. It happens to be true, with a mix of higher average incomes and higher average population density around its centers than any of its peers. Retailers want to be located in strip malls that generate a lot of traffic, for sure, but they really want to be in strip malls that do that in wealthy and population-dense areas.
Layered on top of the strip mall core is a collection of mixed-use developments. These are huge investments that Federal Realty has built over time and that still have further development potential in the future. This provides built-in growth for the REIT as projects get completed. That said, redevelopment and capital investment are themes throughout the portfolio. The company tends to focus on buying strip mall properties where it can invest money to improve the performance of the asset.
This is where things get interesting. Given that one of Federal Realty’s core skills is development and redevelopment, it always has projects in different stages of completion. And, as noted, it is always looking for well-located properties that can benefit from a little of the company’s TLC. But it only owns around 100 assets at a time.
