Put Federal Realty in Your Shopping Cart (Correct)

(Corrects article from 10:34 a.m. ET today regarding information on company square footage and years of paying a dividend.)

NEW YORK ( TheStreet) -- With little new construction in the pipeline, the decline in retail vacancies can now appropriately be called a trend towards recovery.

Rent growth has been measured, but at least follows a positive trajectory as well. While the worst may now be over for retail properties, risks remain given the fragile state of the economy as a whole.

Still, there is reason to celebrate having moved past what could well be the worst downturn for retail real estate in at least three decades.

Many retail real estate investment trusts have already announced third-quarter earnings, with more to follow and thus far, most have reported falling vacancies and growing rents.

In the shopping center sector there are 18 REITs with a combined market capitalization of $41.5 billion (as of Sept. 28) with an average dividend yield of 3.55% and the year-to-date (as of Sept. 28) total return is 24.65%.

Federal Realty: The Gold Standard

In REIT investing, the "gold standard" is measured by dividends -- not just the quantity (highest yield) but the quality. Mortgage REITs are distinguished by higher yielding dividends known for their volatility and higher risk composition; conversely, the quality of the dividend is often diluted by higher leverage (borrowing money to magnify returns) that leads to high volatility and uncertainty.

Many mortgage REITs, including Annaly Capital Management ( NLY), Chimera Investments ( CIM), American Capital Agency ( AGNC) and Armour Residential REIT ( ARR) are connected to debt-laden deals with bumpier dividend performance.

This year Federal Realty ( FRT) celebrates 50 years of being a proven leader in the ownership, operations, and redevelopment of high-quality retail real estate in the country's best markets. Federal Realty has a portfolio containing about 19.1 million square feet located in strategically selected metropolitan markets in the Northeast and Mid-Atlantic, as well as California.

Federal is considered the "gold standard" REIT as it has paid quarterly dividends to shareholders continuously since its founding in 1962, and has increased its dividend rate for 45 consecutive years, the longest in the REIT industry.

Federal: Proof is in the Latest Results

On the company's earnings call last week, Federal CEO, Don Wood, said:

"Like the first half of the year, third-quarter leasing volume was again off the chart in terms of our historical production. The company did 100 deals of more than half a million square feet of comparable space completed in an average rate of $28.43, 11% higher than the $25.63 replaced, that now makes more than 1.3 million sq. ft. of deals in the first nine months of 2012, more than most year's 12 month production and more space than we've ever leased in the nine month period ever. All that volume equates to $4.7 million of incremental rate."

Federal's latest quarter results include earnings per share of $1.12, which included $2.1 million (3 cents a share) of severance charges. Excluding the charges, funds from operations per share of $1.15 was in line with estimates of $1.11 included 4 cents a share of severance charges.

The Street's consensus, which had also embedded severance charges, stood at $1.11.

Federal increased the lower end of its 2012 FFO per share guidance range to $4.29 to $4.31 from of $4.27 to $4.31.

Guidance assumes lease spreads in the range of 10% to 15%, and 5% same-store net operating income.

Federal also reported increased occupancy as same-store NOI growth remained solid.

The company's overall portfolio was 95.1% leased at quarter-end, up 90 basis points from 94.2% leased at the end of the second quarter.

Excluding a one-time lease termination fee of $6 million, same-store net operating income on a GAAP basis was up 3.5% (excluding redevelopment and expansion properties), while same-store NOI was up 4.0% including redevelopment and expansion properties.

Federal's primary advantage continues to be its well-located real estate that is driving double-digit spreads. The company signed 109 leases for 532,000 square feet of retail space during the quarter. Of the 504,000 square feet that are comparable (spaces for which there was a former tenant), the company recorded an average cash rent increase of 11%.

Federal continues to deliver the highest leasing spreads among its shopping center peers.

As further proof of Federal's "gold standard", the company in July completed a $250 million offering (upsized from $150 million due to strong demand) of 3.0% senior unsecured notes due Aug. 1, 2022.

This coupon is the lowest coupon ever for a 10-year unsecured note in the REIT sector.

Proceeds were used to repay borrowings under the revolving credit facility and for general corporate purposes, including the funding of acquisitions or redevelopment activity.

Put Federal Realty in Your Shopping Cart

As the legendary Ben Graham wrote (in "The Intelligent Investor"), "One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company's quality rating".

As Graham believed, "the defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition."

Most clearly, Federal Realty is a "gold standard" REIT that is defined by the consistency in the high-quality shopping centers that creates the consistency in rent checks. As Graham wrote, "consistency and durability are attributes for competitive advantage."

Federal has a remarkable record based on more than four decades of consistency (44 years with paying increased dividends) and the stalwart REIT is further distinguished at least as much for its ability to control risk as for generating reliable returns.

Federal Realty closed at $105.93 per share with a current market capitalization of $6.8 billion. With around 94 properties and assets of around $3.8 billion, Federal has one of the highest quality portfolios in the retail REIT sector. The company's year-over-year total return is 24.2% and the stalwart REIT has a current debt to market of 23.92%.

Source: SNL Financial and Federal Realty Q3 Earnings Call

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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