Federal Realty Trust’s (FRT - Free Report) portfolio of flexible retail properties in strategic major markets, with strong demand and superior income attributes, offers scope for long-term rent growth. However, the company’s expanding development pipeline compounds operational risks by exposing it to rising construction costs, entitlement delays and lease-up risks.
Particularly, its highly productive portfolio enjoys a diversified tenant base of retailers, limiting the company’s risk to any specific industry and offering a stable source of rental revenues. Further, due to the strong demographics and in-fill nature of its properties, it has been able to maintain a high occupancy level and healthy rental rates.
In addition, to retain the relevance of its properties, Federal Realty has been undertaking remerchandising and redevelopment efforts. Moreover, amid challenges in the retail real estate market, the company is diversifying its retail properties to mixed-use ones by adding residential space. In fact, for 2018, the company aims to expand its residential portfolio in major coastal markets. This will significantly contribute to its operating income over the long run.
A decent balance-sheet position, with ample liquidity and sale proceeds from non-core assets support these growth schemes. Such efforts will improve its operating portfolio and help create long-term value.
Federal Realty carries a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Also, shares of the company have declined 5.2% over the past three months, which is narrower than the industry’s loss of 13.5%.
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.
Moreover, the onslaught of e-commerce on physical retailers have made them rationalize their store fleet, while others that are unable to contend with online giants are filing bankruptcies. Consequently, mall landlords such as Kimco Realty Corp (KIM - Free Report) , Macerich Company (MAC - Free Report) , Taubman Centers (TCO - Free Report) and Federal Realty are witnessing decline in mall traffic.
Additionally, a rise in interest rate can pose a challenge for the company. This is because the company’s ability to refinance existing debt would be restricted, while interest cost on new debt would increase. This could affect the company’s financial results and consequently dent its dividend payout.
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