March 2, 2012

Discipline, Balance and an Increasing Dividend: Keys to a Retail REIT’s Success

Andy Blocher of Federal Realty describes his fund’s strategy

Discipline and balance: These are the key principles behind the strategy at Federal Realty Investment Trust (FRT), a REIT that specializes in high-quality retail properties.

“The basis of our strategy is a solid platform of high-quality assets that provide superior levels of growth through rental increases and consistently strong occupancy, but allows us to take a much more selective approach to things like acquisition and development. It’s low risk, but higher growth. Over the last 50 years we’ve been very, very disciplined in the way we invest our money in retail assets in the nation’s best markets,” Andy Blocher, CFO of Federal Realty, told AdvisorOne on Tuesday, adding that despite the trust’s 50-year history, it only owns 88 properties.

“Our asset base hasn’t expanded nearly to the extent as some of our others, but we’ve always been very disciplined in how it is that we’ve approached it. The key to our strategy is owning stuff in the best locations, in the best markets in the country,” Blocher said.

Andy Blocher, CFO, Federal RealtyFRT owns properties primarily on the East and West Coasts, Blocher (left) says. In California, there are properties in the Bay Area, South Bay and San Jose, as well as in Los Angeles and San Diego in Southern California. On the East Coast, FRT owns properties in Washington, Baltimore, Philadelphia, New York, Boston and throughout New Jersey. In 2008, Blocher says, they started shopping in insular markets in South Florida, purchasing properties in Palm Beach, Broward County and Miami-Dade County.

In selecting a property, there are three characteristics, Blocher says. “One, those markets, and our properties in particular, have very, very strong levels of population that surround them; there’s a lot of people. Two, they have very high household income and high levels of educational attainment. And three, and probably most importantly, is they are insular in nature.” By that he means the area is built up enough that the completion is unlikely to purchase land nearby. “The last thing you want to do is have a great asset and then have one of your competitors buy the lot across the street and build the same thing,” he says.

While the economy does present challenges, Blocher notes that different markets feel economic pressure in different ways. In fact, while there hasn’t been a dramatic improvement in his markets, he has seen “continued strength.” For full-year 2011, new tenants are paying 9% more than tenants previously in a particular property, he says. “We’re able to find good tenants in order to beef up some of the vacancies that we have. We continue to be able to drive good solid rent deals.”

“It’s by no means back to where we were in ’05, ’06, ’07, but we continue to see good, solid, stable performance,” he states.

Still, looking ahead, Blocher is hopeful. He expects stable increases in rent in 2012 and high single-digit to low double-digit growth in lease rollover. He’s also hoping for approximately 50 bps of occupancy improvement over the course of the year. “We feel we’re very well set up for the future and not just taking advantage of poor operating performance in an area where there’s not a lot of retail development being done,” he says. “We’ve been able to advance plans and move forward such that we can put shovels in the ground for a couple of pretty significant properties. We’re getting ahead of the game that way.”

Blocher suggests that investors looking at the retail sector should look at it from a landlord’s perspective. “Are retailers being disciplined? Are they opening in the right location? At the end of the day, our business in a lot of ways is very supple. Our goal as the landlord is to create environments where the retailers can maximize their sales. To the extent that they’re maximizing their sales and have the ability to pay rent, we can charge increased rent. Investors should look for those retailers who have a good solid approach to picking not just any location, but improving their location or picking the right location and having a product that’s in demand.”

Ultimately, it all comes down to the dividend in REIT investing, Blocher says, and it’s one of the forces behind REITs relative success lately. “The equity REIT market as a whole as of the end of January was paying a dividend yield of about 3.4% which equates to about a 2.2% relative to the S&P,” he says. “If you’re getting that stream of current income, it helps to protect your cash flow. You’re getting some of it along the way; you make the decision as to whether or not you want to reinvest it, whether or not you want to hold it as cash. That is a stabilizing force, with respect to REIT performance.”

For retirees, that stabilizing force is important. “One of the greatest things from a retiree’s perspective is that income that we just talked about,” Blocher says. One of Federal Realty’s greatest attributes, he says, is its reputation for paying increasing dividends every year. “We have the distinction of having increased our dividends every year for 44 years, every year since 1967.” He acknowledges that past performance is no guarantee, but adds that having your money invested in a company that continually pays and increases its dividends, even during the downturn, is a “very strong attribute.”

What’s more, “People come to expect the increase in dividend,” Blocher continues. “There are still original shareholders who participated in the IPO way back in 1962, who will come to the annual meeting and they’ll tout the dividend, they’ll tout the quality of what is that we own. It’s a stock that’s been able to demonstrate its performance through thick and thin.”

And, after 44 consecutive years of annual dividend increases, Federal Realty is in “elite company of all publicly traded companies in the United States,” Blocher adds. “I want to say last time I looked we were 24th in all publicly traded companies, behind companies like Proctor & Gamble, Coca Cola, Tootsie Roll Industries. We’ve been through all of it: very high inflation, very low inflation, high oil prices, low oil prices, any type of economic crisis and the performance of the company [has allowed] us to increase that dividend every year. In the 50-year history of the company, we’ve only had three CEOs. The words disciplined and balance are key words. It’s a company that always trying to do the right thing and takes its fiduciary obligation to its shareholders very, very seriously.”

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