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We reiterate our Neutral recommendation on Federal Realty Investment Trust. (FRT - Analyst Report) as we expect the stock to perform in line with the broader market. The company reported first quarter 2011 FFO (funds from operations) of $61.3 million or 99 cents per share compared with $57.8 million or 94 cents per share in the year-earlier quarter.

Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Rockville, Maryland-based Federal Realty Investment Trust specializes in owning, managing, developing, and re-developing retail, mixed-use and street-retail properties, primarily in densely populated locations. Its community and neighborhood shopping centers are anchored by supermarkets, drug stores or high-volume, value-oriented retailers, which provide consumer necessities.

Federal Realty owns Class A shopping centers in high income, in-fill areas of the country, with a concentration of assets in Washington DC, Boston, Philadelphia, and California. This provides a significant upside potential for the company, with retailers being more selective about expansion and favoring high-barrier, high-growth areas that fare relatively better.

The possibility of store closings at many Federal Realty centers due to lease terminations adds uncertainty to its earnings stream. It might have to re-let large big box spaces at significantly lower rents in a very tough leasing environment. This affects the top-line growth of the company and puts considerable pressure on its sustainability.

Federal Realty is strengthening its presence in the core markets by acquiring new assets, which would eventually lead to better operational and ownership flexibility throughout the entire portfolio. Federal Realty has a strong balance sheet and has paid uninterrupted dividend since its inception. For full year 2011, Federal Realty reiterated its earlier FFO guidance in the range of $3.95 – $4.02 per share.

Federal Realty currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Acadia Realty Trust (AKR - Snapshot Report) currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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