Here's Why You Should Hold Federal Realty (FRT) Stock Now

Retail REIT Federal Realty Investment Trust (NYSE:FRT) is likely to remain on the growth curve backed by its premium retail assets, diverse tenant base and efforts to improve operating performance through expansion, renovation and re-tenanting support long-term profitability. However, the choppy retail real estate environment and portfolio redevelopment efforts might limit the company’s growth tempo in the near term.

Recently, Federal Realty reported fourth-quarter 2017 adjusted funds from operations (FFO) per share of $1.47, in line with the Zacks Consensus Estimate. Adjusted FFO per share also compared favorably with the prior-year quarter tally of $1.45. Results reflect growth in revenues. However, the company’s proactive releasing efforts to reposition properties had an adverse impact on its quarterly results.

Specifically, Federal Realty has a portfolio of premium retail assets — mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles — which positions it well for decent growth. Again, due to the strong demographics and in-fill nature of its properties, the company has been able to maintain a high occupancy and rental rates.

In addition, Federal Realty has a decent balance-sheet position, with ample liquidity and is continuing with its efforts to boost shareholders’ wealth. The company has paid uninterrupted dividends since its inception in 1962 and its compound annual growth rate of dividend increases over the past 50 years is above 7%. Given the company’s financial position and lower debt-to-equity ratio compared to that of the industry, this dividend rate is expected to be sustainable.

However, shrinking footfall at malls amid shift of consumers toward online channels, store closures and bankruptcy of retailers have emerged as pressing concerns for most retail REITs, including Simon Property Group, Inc. (NYSE:SPG) , GGP Inc. (NYSE:GGP) , The Macerich Company (NYSE:MAC) , Federal Realty and others.

Additionally, amid a fast changing retail environment, the company is making commendable efforts to reposition, redevelop and re-merchandise its portfolio. This includes an upgradation of the tenant mix. 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. In fact, the company’s proactive releasing efforts to reposition properties had an adverse impact on its recently-reported quarterly results.

Moreover, rise in interest rate can pose a challenge for Federal Realty. This is because the company’s ability to refinance its existing debt would be restricted, while interest cost on new debt will increase. This could adversely affect the company’s financial results and consequently dent its dividend payout. Also, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

Amid these, shares of Federal Realty have underperformed the industry it belongs to, over the past three months, depreciating 11.3% as against the 8.0% loss incurred by the industry. Nevertheless, reflecting bullish analyst sentiment, the stock has seen the Zacks Consensus Estimate for FFO per share for first-quarter 2018 being revised 0.7% upward in a month’s time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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