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Federal Realty Pinned at Neutral

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On Oct 8, 2013, we reinstated our long-term recommendation on Federal Realty Investment Trust (FRT - Free Report) – a retail real estate investment trust (REIT) –¬¬ at Neutral. The decision was based on improved performance of the company’s same-center portfolio, dividend hike and strategic buyouts completed in the past quarters.

Yet, stiff competition and rise in online purchases somewhat restrict its growth. Also, an uptick in interest rates and market volatility may dent Federal Realty’s profitability.

Why Neutral?

Federal Realty’s portfolio of high-quality shopping centers, which is located in 20 upscale U.S. markets, has enabled the company to charge higher rental rates and steadily maintain the upward trend. In addition, the company has a diversified tenant base comprising grocery stores and low-end discount retailers – such as Wal-Mart Stores Inc. (WMT - Free Report) and The TJX Companies, Inc. (TJX - Free Report) . Moreover, the company’s successful expansion strategy has long-term value potential and promises steady income growth.

Moreover, Federal Realty reported second-quarter 2013 core FFO (funds from operations) per share of $1.14, beating the Zacks Consensus Estimate by a cent and the year-ago quarter figure by 9.6%. The healthy results came on the back of improved performance in the same-store portfolio and decent top-line growth. It has also marginally raised its outlook for full-year 2013 and hiked its quarterly dividend by 6.8%, depicting the 46th consecutive year of dividend hike.

However, Federal Realty’s active development and redevelopment pipelines expose it to various risks such as rising construction costs, entitlement delays and lease-ups. Additionally, an uptick in customer buyouts through catalogs and the Internet could hurt the demand for the company’s properties. Also, a rising interest rate scenario could adversely affect the company’s borrowing expenses, which may in turn hinder its portfolio repositioning activity.

Over the last 60 days, the Zacks Consensus Estimate for 2013 funds from operations (FFO) per share moved south 0.2% to $4.58. Also, for 2014, it dipped marginally by 0.2% to $4.88. Thus, Federal Realty now carries a Zacks Rank #3 (Hold).

Other Stock to Consider

The retail REIT that is currently performing better includes Simon Property Group Inc. (SPG - Free Report) , which has a Zacks Rank #2 (Buy).

Note: FFO, 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.

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