Federal Realty’s hard-to-beat repeatability

It’s easy to get dazzled by businesses that have their figurative hands in everything. Getting profits from every angle and aspect possible may sound ideal, yet the most complex companies aren’t always the best.

Sometimes they’re just the most complicated to operate, understand, and hold as investments.

As Chris Zook and James Allen write in Repeatability, “Complexity is a silent killer of profitable growth.” These co-authors make a very strong case for holding companies that build simple business models with “repeatable” operations.

For instance McDonald’s (MCD) sticks with serving fast food, predominantly burgers and fries. And Sprouts (SFM) – which I wrote about yesterday – keeps stocking its grocery store shelves with higher-quality, organic, and diet-specific specialty products for its more selective, higher-income clientele.

This isn’t to say these businesses never innovate or adapt. Because they most definitely do. In fact, both companies have entire departments devoted to studying their customer bases, changing expectations and all.

However, those departments still work from the same foundations their larger companies were built on. They don’t chase every new fad. They select viable, applicable trends and act on them accordingly.

McDonald’s doesn’t try to sell financial products. And Sprouts doesn’t try offering Chef Boyardee, Cheetos, and Cherry Coke.

Instead, they know their circles of competency. They stick with their circles of competency. And they keep showing up with the same expertise and basic product offerings within those circles of competency – just in better (or at least better packaged) ways year after year after year.

You can see the same thing with Apple (AAPL) in the technological sphere, Netflix (NFLX) in entertainment… and Federal Realty (FRT) in real estate.

That latter company has been buying and leasing grocery store-anchored shopping centers since 1962. And the results have been beautiful to behold.

Federal Realty might be an old-timer, with over six decades of history under its belt. And it may not have changed its core strategy since it opened all those years ago.

But that doesn’t make it out of touch in any way, shape, or form. This real estate investment trust (REIT) knows exactly what it’s doing.

Federal Realty acquires and develops high-quality shopping centers in some of America’s wealthiest, most densely populated markets. Think Maryland’s Annapolis Town Center, Bethesda Row, and Federal Plaza in Rockville – all higher-end places to live.

On the other side of the country, it operates Santana Row in San Jose, Del Monte Center in Monterey, and East Bay Bridge in Emeryville, California. And it has similar properties in Florida, Massachusetts, and other well-off locales.

Altogether, the company owns or has interest in 103 properties, amounting to around 28.8 million square feet of commercial space that it leases to approximately 3,700 tenants.

While these properties naturally cost more to buy and maintain, Federal Realty makes sure to grow its cash flow in impressively consistent ways… maintain conservative leverage… and raise its dividend every single year for more than 50 years in a row. All while focusing relentlessly on tenant quality.

That’s been true during periods of inflation and economic pullbacks. It was true through the savings and loan crisis in the 1980s, the dot-com collapse in 2000, the housing market crash in 2008, and the 2020 shutdowns.

The economy can change all it wants; Federal Realty does not. Not when it comes to its repeatable business model that keeps customers – and customers’ customers – coming back over and over and over again.

That’s why it’s a trusted realtor that retailers are willing to pay higher prices to rent from. And that’s why I’m writing about it today.

Federal Realty has actually raised its dividend for 58 consecutive years now, making it an undisputed dividend king. In fact, it’s the only dividend king in the real estate investment trust (REIT) space.

I was reminded of how purposefully that status was achieved – and is maintained – while speaking with CEO Don Wood recently. It reflects decades of disciplined capital allocation and conservative balance sheet management.

Not to mention an unwavering focus on owning the highest-quality retail real estate in the country.

Wood explained that Federal Realty's competitive advantage begins with location. Rather than simply owning attractive shopping centers, it focuses on irreplaceable properties where tenant demand consistently exceeds available supply.

That’s why it’s been able to generate steadily growing cash flows through virtually every economic cycle since the dividend was first increased in 1967.

Then there’s its evolution. Again, strong companies assess their situations and grow within their circles of competency, which is exactly what Federal Realty has done.

It still holds grocery-anchored shopping centers. That remains the core of its portfolio. But it’s been branching into highly productive mixed-use developments as well now: post-pandemic properties where people want to shop, dine, work, and live.

Retail productivity remains the common thread here. Federal Realty isn’t trying to overstep into property categories it lacks expertise in. Instead, the added residential, office, and entertainment components serve to strengthen its foundational focus.

One project that highlights this strategy is the redevelopment of Grossmont Center near San Diego. Federal Realty purchased the aging property during the shutdowns, seeing an unusual opportunity to develop it precisely as it saw fit.

Many of Grossmont’s tenant leases were set to expire, opening up tremendous flexibility to improve it. Which is precisely what Federal Realty did.

The Center now includes a new Bass Pro Shops, a modern AMC Theatre, Walmart, Target, and hundreds of thousands of square feet of additional retail. All put together, Wood believes the property will be a long-term earnings driver for decades to come.

We also discussed the REIT's growing residential platform, which leverages underutilized land within existing shopping centers. By integrating apartments with walkable retail, Federal Realty creates highly desirable communities that increase foot traffic for retailers and add to its own bottom line.

Perhaps the most compelling takeaway from my interview with Wood, however, was his outlook for Federal Realty’s future. He believes the company is entering one of the most favorable operating environments it’s seen in decades.

This starts with the fact that virtually no new retail supply has been added to the national count since 2008. Add in strong demand for premier locations, supplemental residential growth, and AI-driven operating efficiencies…

Then top it all off with Federal Realty’s fortress balance sheet, which makes it very easy to take advantage of this status quo. That’s why I continue to view Federal Realty as one of the premier SWAN (sleep well at night) REITs available to long-term dividend investors.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. I’ll be interviewing another dividend stalwart CEO tomorrow, Realty Income’s Sumit Roy. Make sure to watch my full interview with both of these incredible businessmen by subscribing to The Wide Moat Show.

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