Federal Realty Trust Remains Underappreciated By The Market

During the pandemic, we invested in two retail REITs as part of our Retirement Portfolio.

Back then, the entire sector was heavily discounted, so we picked the bluest blue-chips that we could find.

Those were Regency Centers (REG) and Federal Realty Trust (FRT).

Since then, REG has strongly recovered, which led us to sell our position in late 2024 for a 121.8% total return over our ~4-year holding period.

FRT, on the other hand, has yet to fully recover. It has earned us a near 60% total return since we first bought it in May of 2020, which isn’t bad, considering the bear market we have suffered since then.

But it is far short of what REG earned us, despite both being blue-chip retail REITs. This suggests that FRT might have more upside to offer in the coming years.

Here is our updated investment thesis:

Federal Realty Trust: The Best of Best Retail Real Estate

Most REITs focus on Class A properties.

But even within the Class A segment, there are vast differences in property and location quality.

FRT arguably owns the best retail real estate portfolio in the nation.

And that’s not just my potentially biased opinion. It is backed by real data.

First, let’s look at their locations. After all, the long-term success of real estate investments typically comes down to location, location, location... and FRT is miles apart from its peers from this perspective. Its properties are located in the most affluent and densely populated neighborhoods of the country:

This means that its properties enjoy the greatest barriers to entry. These locations are already fully built out, have strict zoning, high replacement cost, and are competing with better-use redevelopment projects that could even reduce retail space over time, making FRT’s portfolio truly irreplaceable.

The higher household incomes also mean that its properties should enjoy greater stability across cycles, as more affluent consumers are typically less impacted by recessions and retain much greater purchasing power.

This theory was proven during the great financial crisis, when FRT was the only retail REIT to keep steadily growing its cash flow even as most of its peers faced significant pain.

But it is not just the superior locations of its properties that set FRT apart.

The properties themselves also stand out. FRT differentiates itself by typically targeting larger open-air properties, often 250,000 square feet or bigger, with lots of acreage. These are not just your typical neighborhood center that pulls traffic from a 3-mile radius. Rather, they are dominant regional centers that can pull consumers from a 10, 15, or even 20-mile radius. They are important regional marketplaces that retailers need to be involved with, resulting in significant demand, despite the limited supply of such properties, especially in these locations.

The large size, significant acreages, and superior locations also give FRT an opportunity to turn these into mixed-use destinations with significant non-retail components. This explains why the REIT today generates about 10% of its rental income from apartment units, and another 10% from mixed-use office.

Here are a few examples from its portfolio to give you an idea.

Santana Row