Federal Realty: Don’t Miss Its Rock-Solid 4.3% Yield (NYSE:FRT)

After a 9% drop, Federal Realty Investment Trust (NYSE:FRT) now offers passive income investors a 4.3% dividend yield and a more compelling valuation based on funds from operations.

The retail REIT has a strong portfolio with high occupancy and a dividend that is easily covered by funds from operations.

The real estate investment trust has increased its dividend for more than 50 years, and given Federal Realty Investment’s low pay-out ratio based on FFO, passive income investors could benefit from a very high-quality dividend for many years to come.

Strong And Economically Resilient Real Estate Portfolio

Federal Realty Investment is a large real estate investment trust that primarily owns commercial real estate but also owns residential real estate.

Federal Realty Investment owned 25.8 million square feet of commercial real estate at the end of the September quarter, with a 94.3% lease rate. The trust’s commercial occupancy increased by 1.5 percentage points YoY as landlords’ economics improved following the pandemic.

As of September 30, 2022, the trust also owned 3,264 residential properties with a 97% occupancy rate.

The portfolio of Federal Realty Investment is well-diversified, with the largest tenant accounting for only 2.8% of the trust’s rental income and the ten largest tenants accounting for only 14.5%. When compared to REITs that are more reliant on a single tenant, low rental income concentration improves diversification and makes dividends more secure.

Sustainable Pay-Out Metrics

Federal Realty Investment has a very low pay-out ratio and key metrics that are even better than Realty Income Corporation (O), a net-lease retail-focused real estate investment trust that is widely regarded as the industry’s gold standard.

Federal Realty Investment earned $1.59 per share in funds from operations in the third quarter, representing 5.3% YoY growth due to a strong rental business that benefited from a broad economic recovery following Covid-19.

In 3Q-22, the FFO-based pay-out ratio was only 68%, indicating that the dividend has a very high margin of safety.

Importantly, I believe Federal Realty Investment distributed less of its funds from operations in 3Q-22 than Realty Income, which distributed 77% of its FFO. In the article ‘Realty Income: A Christmas Gift At $55’, I discussed Realty Income’s portfolio, valuation, and income potential.

Federal Realty Investment has paid a growing dividend for more than a half-century, making FRT one of the market’s longest-paying REIT stocks. As a result, the real estate investment trust has a strong dividend growth track record, which strengthens its credentials with passive income investors. Since 1967, the trust’s dividend payout has increased at a compound annual growth rate of 7%.

FRT pays a stock yield of 4.3% based on a current dividend pay-out of $4.32 per share, and the dividend is unlikely to increase in the future. Given the strength of FRT’s dividend yield, I believe the real estate investment trust can assist passive income investors in stabilizing their portfolios during the stock market’s inevitable ups and downs.

Federal Realty Investment Raised Its Guidance

In the third quarter, Federal Realty Investment increased its FFO guidance from $6.10-6.25 per share to $6.27-6.32 per share. The trust is currently trading at 16.1x FFO based on the revised funds from operations forecast for 2022. Realty Income Corporation, a major player in the retail rental industry, trades at 16.3x FFO.

Why Federal Realty Investment Could See A Lower FFO Multiple (Risks)

Federal Realty Investment, with a pay-out ratio of 68%, can provide a decent yield with a high margin of safety to passive income investors.

The trust, on the other hand, is exposed to the commercial real estate market, which is more volatile and cyclical than the residential market. As a result, FRT may experience higher FFO volatility and lower occupancy than trusts with a sole focus on the residential market.

Having said that, because the payout ratio is so low, passive income investors, in my opinion, don’t have to worry about the dividend continuing on its upward trend.

My Conclusion

Passive income investors can profit from the recent drop in the stock price of Federal Realty Investment. The REIT is extremely well-managed, has a diverse real estate portfolio with high occupancy, and continues to cover its dividend with funds from operations.

Furthermore, the trust has paid a growing dividend for more than 50 years, and the low FFO-based pay-out ratio strongly suggests that the company will continue to raise its dividend for passive income investors in the coming years.