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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.
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 Dec 31, 2023, no single tenant accounted for more than 2.7% of the annualized base rent. We estimate year-over-year growth of 3.8%, 5.4% and 7.5% in the company’s rental income in 2024, 2025 and 2026, respectively.
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.
Going forward, Federal Realty has expertise in raising its operating performance through the conversion, redevelopment and repurposing of assets. As of the end of 2023, throughout the portfolio, Federal Realty has redevelopment projects underway. Its in-process strategic redevelopment pipeline is encouraging, with $320 million of projects in process. Also, this retail REIT has ongoing improvements at 16 properties to better position the assets to capture a disproportionate amount of retail demand. Such efforts bode well for FRT’s long-term growth.
Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited 2023 with $1.3 billion of total liquidity in cash and credit facility proforma for January financing activity and dividends paid. The annualized net debt-to-EBITDA ratio came in at 5.9, down from 6 as of Sep 30, 2023. It is targeting a ratio in the mid-5x over the next year.
The company has no debt maturities remaining in 2024 and no material maturities until 2026. Federal Realty’s credit ratings of BBB+ and Baa1 from Standard & Poor's and Moody's, respectively, enable it to procure debt financing at a favorable cost.
Shares of this Zacks Rank #3 (Hold) company have risen 0.1% in the past month against the industry's decline of 3.4%. Analysts seem bullish, with the Zacks Consensus Estimate for 2024 funds from operations (FFO) per share being revised marginally upward over the past month.
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.
Further, macroeconomic uncertainty and a high interest rate environment 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 5.3% in the company’s interest expenses in 2024.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
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.
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 Dec 31, 2023, no single tenant accounted for more than 2.7% of the annualized base rent. We estimate year-over-year growth of 3.8%, 5.4% and 7.5% in the company’s rental income in 2024, 2025 and 2026, respectively.
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.
Going forward, Federal Realty has expertise in raising its operating performance through the conversion, redevelopment and repurposing of assets. As of the end of 2023, throughout the portfolio, Federal Realty has redevelopment projects underway. Its in-process strategic redevelopment pipeline is encouraging, with $320 million of projects in process. Also, this retail REIT has ongoing improvements at 16 properties to better position the assets to capture a disproportionate amount of retail demand. Such efforts bode well for FRT’s long-term growth.
Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited 2023 with $1.3 billion of total liquidity in cash and credit facility proforma for January financing activity and dividends paid. The annualized net debt-to-EBITDA ratio came in at 5.9, down from 6 as of Sep 30, 2023. It is targeting a ratio in the mid-5x over the next year.
The company has no debt maturities remaining in 2024 and no material maturities until 2026. Federal Realty’s credit ratings of BBB+ and Baa1 from Standard & Poor's and Moody's, respectively, enable it to procure debt financing at a favorable cost.
Shares of this Zacks Rank #3 (Hold) company have risen 0.1% in the past month against the industry's decline of 3.4%. Analysts seem bullish, with the Zacks Consensus Estimate for 2024 funds from operations (FFO) per share being revised marginally upward over the past month.
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.
Further, macroeconomic uncertainty and a high interest rate environment 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 5.3% in the company’s interest expenses in 2024.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Host Hotels & Resorts (HST - Free Report) and Iron Mountain (IRM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
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.