Federal Focuses On Quality

Finger emphasized the quality of Federal's holdings, which include approximately 17.4 million sf located primarily in the Northeast, the Mid-Atlantic states, and California, not counting additional space that the REIT owns in joint ventures."The only way to own a large portfolio of high-quality shopping centers today is to have acquired them over a long period of time, and to have acquired them before the properties became infill locations. That's what Federal Realty has done," Finger said.

The Federal CFO explained that the company was formed in 1962, making it one of the oldest public REITs in the country. Calling Federal's holdings, "the highest quality shopping center portfolio in the industry," he cited as one example the Congressional Plaza in Rockville, MD. "When we bought it in 1965, it was not an infill property," Finger said. Since then, the area around the center has been built out so completely that there is no land to develop anywhere near the center, which is now in the middle of a high-income, high-density population that is typical of the incomes and densities surrounding other Federal properties. Based on average density and income in the trade areas surrounding shopping centers, Federal's properties have an average of $3.5 billion of annual income to draw from in the surrounding populations, compared with an average of $2 billion in its peer group of competing companies, according to Finger.

Owning high-quality centers has enabled Federal to develop "a low-risk operating strategy that allows us to capitalize on the infill nature of the properties," Finger said. "We will generate the highest growth in the sector, or one of them, quarter in and quarter out, without making a single acquisition," he said. "That allows us to only make acquisitions that add to our growth, as opposed to relying on acquisitions to create earnings growth." Internal growth is more reliable than new development and acquisitions, which are also riskier than relying on internal growth, he commented.

Federal's infill locations also generate redevelopment opportunities, according to Finger, who cited redevelopment as the second element of the company's strategy. One of the most common ways in which the REIT redevelops is to expand grocery stores at its centers, where the expansions typically also enhance Federal's capacity to draw in more shop tenants. The company has about $168 million of redevelopment in the pipeline that will stabilize this year and next, about $150 million to $200 million that will stabilize in the following two years, and $50 million to $100 million a year for each of the next seven years.