Published on 23 Aug 2023 on Zacks via Yahoo Finance
Is It Wise to Retain Federal Realty (FRT) Stock for Now?
The increased consumer preference for in-person shopping experiences following the pandemic downtime has been driving the recovery of the retail real estate industry. Amid this, Federal Realty FRT is well-poised to benefit from its portfolio of premium assets in the United States.A diversified tenant base, a focus on essential retail and mixed-use assets and the balance sheet strength of the company augur well. However, high e-commerce adoption is likely to weigh on Federal Realty. Macroeconomic uncertainty and a high-interest-rate environment add to its woes.This retail real estate investment trust’s (REIT) properties are located in the first-ring suburbs of the nine major metropolitan markets of the United States, mainly in the key coastal markets from Washington DC to Boston, MA, San Francisco and Los Angeles.Due to the strong demographics and infill nature of its properties, Federal Realty has been able to maintain a high occupancy level over the years. Occupancy rates in the portfolio increased 80 basis points (bps) year over year to 92.8% as of Jun 30, 2023.Furthermore, with solid consumer spending and the rebound in the retail industry, the retail REIT is poised to benefit from its superior assets in premium locations and experience an improving leasing environment. We estimate the leased occupancy rate for 2023 to be 94.3%.The company has a well-diversified tenant base of retailers, including TJX Companies, Kroger and CVS Corporation. This minimizes risks related to any particular retail industry and assures a stable source of rental revenues. For 2023, we estimate the company’s rental income to grow 4.8% year over year.Federal Realty’s efforts to explore the mixed-use development option, which has gained immense popularity in recent years, will enable it to tap growth opportunities in areas where people prefer to live, work and play. Moreover, FRT’s expansion efforts into premium markets and initiatives to redevelop and reposition its assets seem encouraging.Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited second-quarter 2023 with $1.3 billion of total liquidity. Its investment-grade credit ratings render the company favorable access to the debt market. With a strong balance sheet, FRT is well-positioned to capitalize on long-term growth opportunities.Solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Federal Realty is committed to the same. In August 2023, concurrent with the second-quarter 2023 earnings release, FRT announced a hike in its regular quarterly cash dividend to $1.09 per share from $1.08 paid out earlier. The company has paid out uninterrupted dividends since its inception in 1962, and the latest hike marked the 56th consecutive year of common dividend increases by the company.Moreover, backed by healthy operating fundamentals, we expect funds from operations (FFO) to increase 5.3% in 2023. Given the company’s solid operating platform, our FFO growth projections and balance sheet strength compared with industry counterparts, this dividend rate is expected to be sustainable.Moreover, shares of Federal Realty have risen 7.6% over the past three months, outperforming its industry’s growth of 3.6%.
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