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Can Rebound in Retail Sales Boost Federal Realty Stock?

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While challenges in the retail space have been well documented, the recently-released retail sale numbers indicate a brighter picture for retail real estate industry investment trusts (REITs).

Per the Commerce Department, retail sales figure for the month of July marked sequential growth of 0.5%, higher than market estimates of 0.1% rise. This also reflects an increase of 6.4% from the year-ago tally.

These encouraging figures are backed by the economy gaining traction as well as a robust labor market. The booming economy has also pushed wages and driven consumer spending.

As for Federal Realty Investment Trust (FRT - Free Report) , the company remains fairly focused on its retail platform. With an impressive footprint in eight strategic metropolitan market and a diverse tenant roster, the company is well poised to grow.

Impressively, as of Jun 30, 2018, no single tenant accounted for more than 3% of annual base rent. This limits the company’s risk to any particular retail industry and positions it well for experiencing a stable source of rental revenues.

Further, due to the strong demographics and infill nature of its properties as well as long-term leases, the company has been able to maintain decent leasing activity supported by high occupancy and attractive rental rates.

Additionally, it has been capitalizing on expansion opportunities in premium markets to attain higher income growth and ensure long-term value. In fact, the company has ventured into the residential real estate space and aims to fortify its presence in major coastal markets. This will significantly contribute and diversify the company’s operating income over the long run. Moreover, it has resorted to non-core asset dispositions to fund its growth plans. In fact, management anticipates selling assets worth nearly $70 million through the rest of the year.

Also, a fortress balance sheet and ample liquidity will enable it to pay sustainable dividends and enhance shareholders’ wealth. In fact, it exited second-quarter 2018 with cash and cash equivalents of approximately $56.1 million. Moreover, in August, the company announced a 2% hike in quarterly dividend. On Jul 31, 2017, it announced a hike of 2% in its quarterly dividend payout. Remarkably, it has paid uninterrupted dividends since its inception in 1962 and the latest hike marked the 51st consecutive year of common dividend increase by the company.

Shares of this Zacks Rank #3 (Hold) company have appreciated 11.1% in the past three months compared with its industry’s growth of 10.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Although higher retail sales have helped to ease concerns for retail REITs like Federal Realty, GGP Inc. , Kimco Realty Corp. (KIM - Free Report) and Macerich Company (MAC - Free Report) , mall traffic continues to suffer as consumers have shifted shopping habits to online channels. This has compelled retailers to reconsider their footprint and eventually opt for store closures in recent years while others unable to cope with competition have been filing bankruptcies. Such an environment has also led to tenants demanding substantial lease concessions, which mall landlords find unjustified.

Federal Realty is adapting to the changing landscape of the retail environment by focusing on portfolio repositioning, redevelopment and re-merchandising. The company anticipates incurring nearly $195 million on its redevelopment projects that are expected to stabilize in the next several years. Although repositioning and redevelopment are a strategic fit for long-term growth, such initiatives involve considerable upfront costs and tend to drag down near-term profitability.

Further, its extensive development and redevelopment pipeline compounds operational risks by exposing it to construction costs overruns, entitlement delays and lease-up risks.

Lastly, hike in rate of interest is expected to affect the REIT’s rate-sensitive business. It would restrict the company’s ability to refinance existing debt while increasing the interest cost on new debt. This has the power to adversely impact Federal Realty’s financial results and dividend payout.

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