Source: imgflip 2017 saw the largest number of US retail store closings in history, which the media has dubbed the "retail apocalypse". However, in reality, rumors of traditional retail"s demise are greatly exaggerated. Source: Hoya Capital Real Estate In fact, traditional retail sales have been growing around 2% a year since 2005, right alongside the overall US economy. Better yet? In 2017, a strengthening economy meant that brick & mortar retail growth actually accelerated. This is why, despite over 10,000 total store closings, the number of US retail stores actually increased by over 4,000. Source: Hoya Capital Real Estate In addition, shopping center REITs as a whole have continued to post slow but steady same-store net operating income or NOI growth throughout this so called "apocalypse". Source: Hoya Capital Real Estate The bottom line is that shopping center REITs, like all real estate, are made up of both high, medium, and low quality names. This means that there continue to be Grade A industry leaders with world class management, strong balance sheets, and strong growth prospects. Let"s take a look at Federal Realty Investment Trust (FRT), which is not just the gold standard in its industry, but arguably one of the best REITs you can own period. More importantly, thanks to the recent sell-off in REITs, Federal Realty is now trading at some of the most attractive valuations in years. That means that this is likely a great time to add the only REIT dividend king to your diversified high-yield dividend portfolio. Source: FRT Investor Presentation Federal Realty Investment Trust may not be a massive REIT, but since its founding in 1962 (making it one of the oldest REITs in the world), it has proven an exceptional ability to make investors rich. It"s done so thanks to its exemplary management team, led by CEO Donald Wood, who took over the top spot in 2002 after serving for four years as COO and CFO. Specifically, FRT has focused on quality over quantity, being highly selective about only purchasing or developing shopping centers in the nation"s premier property markets. Today, it owns 104 centers making up 24.1 million feet of leasable square footage leased to over 2,800 tenants. Source: FRT Investor Presentation Federal Realty"s centers are located in very high density and very affluent areas, which is why it enjoys the industry"s best average rent per square foot by far. Source: FRT Investor Presentation The REIT is also highly diversified by both industry subcategory, as well as tenants, with no customer making up more than 2.9% of annual rent. Source: FRT Investor Presentation, Earning Supplement Federal Realty"s focus on top-tier shopping centers located in prime locations also means it has consistently enjoyed the industry"s top lease spreads. This means that FRT is able to obtain higher rents anytime it signs a new lease, whether with a new tenant (if an old one has failed or left) or when renegotiating expiring leases. Source: FRT Investor Presentation In the most recent quarter, Federal Realty"s lease spread came in at a very healthy 14%, with 400,000 square feet of space leased at an average rental rate of $ 38.24 per square foot. This helped it to achieve same-store YOY operating income growth of 2.6%, 4.4% when including redeveloped properties. And speaking of redeveloped properties, this is the key to the REIT"s strong growth prospects going forward. That"s because in recent years FRT has been investing into non retail properties, such as offices, hotels, and apartments (it owns over 2,052 rental units). Source: FRT Investor Presentation In the coming years, management says it wants 20% of rent to come from non retail properties. Not only will this provide greater diversification but because the hotels, offices, and apartments are located on top or near its shopping centers, they help to further drive higher traffic that benefits its tenants. That, in turn, means continued strong leasing spreads. But wait it gets better. Federal Realty"s plans to invest more heavily into non retail means it has a much larger growth market to target in the future, about $ 4 billion over the next 15 years. The cash yields on these investments are usually about 7% to 8% which is much higher than traditional shopping centers (6.3% cash yield historically). This brings us to another major competitive advantage, FRT"s industry-leading low cost of capital. This ensures strong AFFO yield spreads (cash yield minus cost of capital) on all its investments. The low cost of capital is thanks largely to two things. First, the REIT has been very conservative with debt, which is why it has one of the highest investment grade credit ratings in all of REITdom (more on this later). Second, Federal Realty"s track record of successfully adapting to challenging and constantly shifting industry conditions is literally the best in the business. That"s both in terms of growing its funds from operation or FFO (operating cash flow) per share far faster than lower quality rivals, as well as being the only dividend king REIT in the world. Source: FRT Investor Presentation Basically, Federal Realty Investment Trust is the bluest of REIT blue chips and the ultimate sleep well at night (SWAN) stock. The disciplined and very shareholder friendly corporate culture has proven to be incredibly resilient which is why the REIT rightfully trades at a substantial premium to its lower quality rivals (more on this in a moment). However, that premium helps to ensure low costs of equity which allows management to, in concert with retained cash flow and modest amounts of low cost debt, ensure it has ample low cost liquidity with which to grow. In fact, today FRT"s liquidity (remaining borrowing power + cash) stands at $ 781 million, which is enough to fund about three years worth of its planned investments. Combined with its existing redevelopment pipeline, as well as its ongoing opportunistic acquisitions, Federal Realty is likely to remain one of the fastest growing shopping center REITs in America. Shopping Center REIT FFO Growth Projections Source: Brad Thomas Or to put another way, Federal Realty is perfectly positioned to take advantage of America"s accelerating economy and rising consumer spending which bodes well for its long-term dividend growth prospects. Ultimately, REIT investing is all about the dividend. That means that investors need to pay particular attention to the dividend profile which is composed of three parts: yield, dividend safety, and long-term growth prospects. As one might expect from a dividend king, Federal Realty offers a very safe payout courtesy of one of the industry"s lowest FFO payout ratios. But of course, there"s more to dividend safety than just a low payout ratio. One also needs to make sure that a REIT isn"t drowning in debt. Fortunately, Federal Realty always takes a long-term approach to business, which means a highly conservative balance sheet. That includes below average leverage ratio, a very strong fixed charge coverage ratio, and an interest coverage ratio that"s much greater than its peers. The REIT also has the lowest amount of variable rate debt (1%) in the industry.The Undisputed King Of Shopping Center REITs
Approximate AFFO Weighted Average Cost Of Capital 2.9% Historical AFFO Cash Yield On Invested Capital 6.3% Approximate AFFO Yield Spread 3.4%
Sources: management guidance, FastGraphs, MorningstarDividend Profile: Excellent Income Growth And Risk-Adjusted Return Potential
REIT Yield 2017 FFO Payout Ratio 10 Year Projected Dividend Growth 10 Year Potential Annual Total Return 5 Year Beta Risk Adjusted Potential Total Returns Federal Realty Investment Trust 3.2% 67% 5% to 7% 8.2% to 10.2% 0.337 24.3% to 30.3% S&P 500 1.7% 50% 6.2% 7.9% 1.0 7.9%
Sources: management guidance, GuruFocus, FastGraphs, yCharts, CSImarketing, multpl.com
REIT Forward Net Debt/EBITDA EBITDA/Interest Fixed Charge Coverage Ratio Debt/Capital S&P Credit Rating Federal Realty Investment Trust 5.4 5.5 4.1 56% A- Industry Average 5.8 3.4 NA 62% NA
Sources: FRT Investor presentation, earnings supplement, Morningstar, CSImarketing, FastGraphs
Thursday, January 25, 2018
It's Finally Time To Buy This Dividend King
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