Federal Realty’s prudent strategies serve it well in a tough period.
May 4, 2010 10:55 AM, Mike Janssen
PROBLEM:
The recession presented REITs with a challenging climate for dealing with affected tenants, acquiring new properties and redeveloping. Although the sector still performed relatively well, some slowing was inevitable.
SOLUTION:
Federal Realty Investment Trust weathered the downturn primarily by sticking with tried-and-true principles of its 42-year history. It pulled back on acquisition, redoubled efforts to maximize rent growth at existing properties and secured short-term leases to keep centers full.
BUZZ:
Federal anticipates increased acquisition in coming years, at a rate of three to five properties a year with a target of investing $1 billion over four years. It will also step up redevelopment and, in the long term, is also focusing on mixed-use properties such as Assembly Square outside Boston.
DATA:
The average Federal property is twice as large as the sector’s average: about 200,000 square feet compared to 100,000 square feet. Its average rent per square foot is also higher: $21.93 as of October 2009, compared to $11.24 for all strip retail, according to Morgan Keegan.
In a time when the economy has not been hospitable to owners and retailers, Federal Realty Investment Trust has emerged from what may be the dwindling of the recession with its finances sound. Based in Rockville, Md., the 48-year-old REIT has a reputation for steady management and a recent conservative approach to development that has kept it in good stead during challenging times.
Over the past five years Federal’s returns to shareholders have exceeded both the average performance of the Standard & Poor’s 500 and the FTSE NAREIT Equity Total REIT Index. Its annual dividends have increased for 42 consecutive years. And Federal was able to continue raising rents at properties in 2009—one of the few REITs able to do so last year.
Those increases buoyed its total revenues, offsetting a decline in income from continuing operations. By year’s end it realized record annual revenues and operating cash flows.
And perhaps most importantly, the firm faced very little drama during what was a fairly tumultuous period for some other REITs that had to wrestle with huge debt loads. Federal’s conservative debt position heading into the recession meant it did not need to do much balance sheet cleaning.
CFO Andrew Blocher and COO Dawn Becker have held to a core principle of keeping Federal Realty’s structure and financial arrangements simple.
Most recently, Federal conducted a public offering of $150 million of 10-year senior unsecured notes in early March. And in 2009 it closed on $150 million of senior unsecured notes and $115 million of common shares.
But some of that activity was driven more by opportunities the REIT saw in front of it as opposed to having to any problems on its balance sheet.
In fact, ever since the well-publicized 2002 fire that damaged its then in-progress Santana Row development, Federal Realty has been free of controversy. The fire wiped out retail and restaurant space and roughly 250 apartments. The opening of the project was delayed. But the company (and project) bounced back quickly.
The fire, in part, contributed to the conservative approach that has since served Federal so well. At the time, Federal was dipping its toe into mixed-use development with other “Row” themed projects like Bethesda Row and Pentagon Row. While all the projects have had their share of success, Federal opted to refocus in recent years on what built the company in the first place. While it handles all types of retail real estate save for enclosed malls, it specializes in neighborhood shopping centers.
As a result, the REIT’s history of performance has earned its stock high ratings and prompted Chicago-based Zacks Investment Research to dub Federal “one of the best-positioned strip mall REITs.”
Ask analysts and Federal’s management how the REIT has managed such strong performance, and the answer boils down to several key points. For one, Federal is selective about the properties it acquires. It doesn’t hurt that a good share of its 84 assets are in Washington, D.C., and the surrounding suburbs, a region that has fared better during the economic downturn than most other metropolitan areas.
Federal also flies solo for the most part, eschewing excessive partnerships that might complicate its dealings. “Simplicity is a beautiful thing when you don’t have a lot of outside influences that you have to factor into your thinking,” says COO Dawn Becker. “If the institutional funds that have been investing with our competitors are having problems, it becomes their problem.”
And Federal has been consistent in sticking to these principles, with a management team that Becker and CFO Andrew Blocher say sees eye to eye on important factors in decision-making. The REIT doesn’t get distracted by ploys to significantly boost acquisitions or veer from its core strategies aimed at steady internal growth.
“We are very, very comfortable hitting singles, doubles and occasional triples,” Blocher says. “The issue with trying to hit home runs is that you strike out a lot.”
Alexander Goldfarb, senior REIT analyst at New York-based Sandler O’Neill, echoes Blocher’s message. “They really stick to their knitting,” Goldfarb says of Federal. “They’re not a big acquirer. They’re very particular about the assets they acquire, and their business model really thrives on rolling the existing portfolio as leases come up.… Their business model doesn’t necessitate large-scale transactions, acquisitions or development to grow.”
High rents in choice markets
A public company since its founding, Federal was born just two years after the introduction of the REIT corporate designation in 1960. It is the third-oldest REIT, according to Blocher.
With its roots in the Washington suburbs, Federal began acquiring residential properties in the area before shifting its focus to commercial real estate. Its concentration on the D.C. region proved prescient as residential development accelerated around its acquisitions. Today 17 of Federal’s properties are in Maryland, the most of any state. Another 15 are in Virginia.
“Having 33 percent of their portfolio in the D.C. area is...Continue reading on next page
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