We maintain our ‘Neutral’ rating on Federal Realty Investment Trust (FRT - Analyst Report), a Maryland-based real estate investment trust (REIT) engaged in owning, managing, developing, and redeveloping retail, mixed-use and street-retail properties, primarily in densely populated locations.
Federal Realty owns Class A shopping centers in high income, infill 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 in a challenging macro-economic environment.
The community and neighborhood shopping centers of the company are anchored by supermarkets, drug stores or high-volume, value-oriented retailers, which provide consumer necessities and are relatively immune to the volatility in the market. In addition, Federal Realty generally signs long-term leases with annual bumps, which is a good hedge against inflation and produces a steady stream of recurring income.
Furthermore, the company has the unique distinction of increasing the dividend for 44 consecutive years – the longest in the REIT industry. This offers a unique investment proposition for investors looking for solid dividend payouts, and augurs well for its long-term growth.
However, the possibility of store closings at many Federal Realty centers due to lease terminations adds uncertainty to the earnings, and 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.
The company also operates in a highly fragmented market and faces stiff competition from other real estate investment trusts as well as from local, regional, and national real estate developers. This affects the top-line growth of the company and puts considerable pressure on maintaining its profitability through stringent cost-cutting measures.
Federal Realty currently retains a Zacks #2 Rank that translates into a short-term ‘Buy’ rating. We also have a ‘Neutral’ rating and a Zacks #3 Rank (short-term ‘Hold’ rating) for National Retail Properties, Inc. (NNN - Snapshot Report), one of the competitors of Federal Realty.