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Here's Why You Should Retain Federal Realty (FRT) Stock Now
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Federal Realty (FRT - Free Report) is poised to ride the growth curve on its properties’ upscale locations with well-off communities and favorable demographics. Efforts to diversify its portfolio and strengthen its mixed-use assets, backed by a solid balance sheet, seem encouraging for long-term growth. However, higher e-commerce adoption, tenant bankruptcies and macroeconomic uncertainties raise concerns. High interest rates add to its woes.
What’s Aiding FRT?
Federal Realty owns properties in the first-ring suburbs of the nine major metropolitan markets of the United States, mainly in the key coastal markets from Washington D.C. to Boston, San Francisco and Los Angeles. Given the solid demographics and infill nature of its properties, the company experiences decent leasing activity, aiding occupancy growth.
During the third quarter, FRT signed 105 leases for 565,496 square feet of retail space. Occupancy rates in the portfolio increased by 20 basis points (bps) year over year to 92.3% as of Sep 30, 2023. With solid consumer spending and the rebound in the retail industry, this trend is likely to continue. We estimate the leased occupancy rate for 2023 to be 94.2%.
The company enjoys a well-diversified tenant base of retailers, including industry bellwethers like TJX Companies, Ahold Delhaize and CVS Corporation. This limits the company’s risk to any particular retail industry and positions it well for experiencing a stable source of rental revenues. As of Sep 30, 2023, no single tenant accounted for more than 2.70% of the annualized base rent (“ABR”) and the top 25 tenants accounted for only 24.32% of the ABR. For 2023, we estimate the company’s rental income to grow 5.3% year over year.
Federal Realty’s efforts to diversify its portfolio with residential and office properties are likely to pay off well. Exploring the mixed-use development option, which has gained immense popularity in recent years, will enable the company to tap into growth opportunities in areas where people prefer to live, work and play.
Its expansion efforts into premium markets and initiatives to redevelop and repurpose its assets seem encouraging. As of third-quarter 2023 end, throughout the portfolio, it has redevelopment projects underway, with an estimated total cost of approximately $228 million, which it expects to stabilize over the next several years.
Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited third-quarter 2023 with $1.3 billion of total liquidity in cash and credit facility. The annualized net debt-to-EBITDA ratio was 6 as of Sep 30, 2023.
Federal Realty’s credit ratings of BBB+ and Baa1 from Standard & Poor's and Moody's, respectively, render it access to the debt market at favorable costs. Hence, with a solid financial footing, FRT seems well-placed to bank on long-term growth opportunities.
Shares of this Zacks Rank #3 (Hold) company have risen 8.7%, almost in line with the industry's growth of 8.8%. Analysts seem bullish with the Zacks Consensus Estimate for 2023 funds from operations (“FFO”) per share being revised marginally upward over the past month to $6.55.
Image Source: Zacks Investment Research
What’s Hurting FRT?
However, given the convenience of online shopping, it is likely to remain a popular choice among customers. Consequently, this is expected to adversely impact the market share for brick-and-mortar stores and affect Federal Realty.
Amid macroeconomic uncertainty and a high interest rate environment, a slowdown in the economy and the depletion of savings could limit consumers’ willingness to spend to some extent in the coming quarters. Also, the likelihood of tenant bankruptcies in the near term could affect the company’s profitability and hurt occupancy.
Given the prevailing high interest rate environment, Federal Realty may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. We anticipate a year-over-year rise of 24.5% in the company’s interest expenses in 2023.
The Zacks Consensus Estimate for NNN REIT’s current-year FFO per share has been revised upward by a penny to $3.24 over the past month.
The Zacks Consensus Estimate for Tanger’s ongoing year’s FFO per share has been raised by three cents to $1.94 over the past month.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Here's Why You Should Retain Federal Realty (FRT) Stock Now
Federal Realty (FRT - Free Report) is poised to ride the growth curve on its properties’ upscale locations with well-off communities and favorable demographics. Efforts to diversify its portfolio and strengthen its mixed-use assets, backed by a solid balance sheet, seem encouraging for long-term growth. However, higher e-commerce adoption, tenant bankruptcies and macroeconomic uncertainties raise concerns. High interest rates add to its woes.
What’s Aiding FRT?
Federal Realty owns properties in the first-ring suburbs of the nine major metropolitan markets of the United States, mainly in the key coastal markets from Washington D.C. to Boston, San Francisco and Los Angeles. Given the solid demographics and infill nature of its properties, the company experiences decent leasing activity, aiding occupancy growth.
During the third quarter, FRT signed 105 leases for 565,496 square feet of retail space. Occupancy rates in the portfolio increased by 20 basis points (bps) year over year to 92.3% as of Sep 30, 2023. With solid consumer spending and the rebound in the retail industry, this trend is likely to continue. We estimate the leased occupancy rate for 2023 to be 94.2%.
The company enjoys a well-diversified tenant base of retailers, including industry bellwethers like TJX Companies, Ahold Delhaize and CVS Corporation. This limits the company’s risk to any particular retail industry and positions it well for experiencing a stable source of rental revenues. As of Sep 30, 2023, no single tenant accounted for more than 2.70% of the annualized base rent (“ABR”) and the top 25 tenants accounted for only 24.32% of the ABR. For 2023, we estimate the company’s rental income to grow 5.3% year over year.
Federal Realty’s efforts to diversify its portfolio with residential and office properties are likely to pay off well. Exploring the mixed-use development option, which has gained immense popularity in recent years, will enable the company to tap into growth opportunities in areas where people prefer to live, work and play.
Its expansion efforts into premium markets and initiatives to redevelop and repurpose its assets seem encouraging. As of third-quarter 2023 end, throughout the portfolio, it has redevelopment projects underway, with an estimated total cost of approximately $228 million, which it expects to stabilize over the next several years.
Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited third-quarter 2023 with $1.3 billion of total liquidity in cash and credit facility. The annualized net debt-to-EBITDA ratio was 6 as of Sep 30, 2023.
Federal Realty’s credit ratings of BBB+ and Baa1 from Standard & Poor's and Moody's, respectively, render it access to the debt market at favorable costs. Hence, with a solid financial footing, FRT seems well-placed to bank on long-term growth opportunities.
Shares of this Zacks Rank #3 (Hold) company have risen 8.7%, almost in line with the industry's growth of 8.8%. Analysts seem bullish with the Zacks Consensus Estimate for 2023 funds from operations (“FFO”) per share being revised marginally upward over the past month to $6.55.
Image Source: Zacks Investment Research
What’s Hurting FRT?
However, given the convenience of online shopping, it is likely to remain a popular choice among customers. Consequently, this is expected to adversely impact the market share for brick-and-mortar stores and affect Federal Realty.
Amid macroeconomic uncertainty and a high interest rate environment, a slowdown in the economy and the depletion of savings could limit consumers’ willingness to spend to some extent in the coming quarters. Also, the likelihood of tenant bankruptcies in the near term could affect the company’s profitability and hurt occupancy.
Given the prevailing high interest rate environment, Federal Realty may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. We anticipate a year-over-year rise of 24.5% in the company’s interest expenses in 2023.
Stocks to Consider
Some better-ranked stocks from the REIT sector are NNN REIT, Inc. (NNN - Free Report) and Tanger Inc. (SKT - Free Report) . While Tanger sports a Zacks Rank #1 (Strong Buy), NNN REIT carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for NNN REIT’s current-year FFO per share has been revised upward by a penny to $3.24 over the past month.
The Zacks Consensus Estimate for Tanger’s ongoing year’s FFO per share has been raised by three cents to $1.94 over the past month.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.