Should You Retain Federal Realty (FRT) In Your Portfolio?

We updated our research report on Federal Realty Investment Trust (NYSE:FRT) on May 24.

Early this May, Federal Realty posted first-quarter 2017 funds from operations (“FFO”) per share of $1.45, beating the Zacks Consensus Estimate of $1.43. The figure also came higher than the prior-year quarter tally of $1.38. Results were backed by growth in revenues.

Total revenue for the quarter grew 4.6% year over year to $207.4 million. In addition, the top line exceeded the Zacks Consensus Estimate of $206.7 million.

On a comparable-space basis (spaces for which a former tenant was there), Federal Realty leased 523,869 square feet, at an average cash-basis contractual rent escalation of 11%. Rent increases (on a straight-line basis) for comparable retail space averaged 23% for the first quarter. Same-center property operating income (including redevelopments) improved 4.3% year over year. Excluding such properties, same-center property operating income grew 1%.

The company’s portfolio of premium retail assets – mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles – along with a diverse tenant base, positions it well for decent growth.

However, mall traffic continues to shrink amid a rapid shift in customers’ shopping preferences, with non-store sales rising significantly. This has been adversely affecting demand for retail space and has become a pressing concern for retail REITs like Federal Realty.

Amid this fast evolving retail environment, the company is making concerted efforts to reposition, redevelop and re-merchandise its portfolio. This includes an upgradation of the tenant mix. While such efforts are a strategic fit for the long term, the short-term adverse impact on earnings cannot be bypassed.

Over the past six months, shares of Federal Realty underperformed the Zacks categorized REIT and Equity Trust – Retail industry. During this time frame, shares of Federal Realty descended 10.8%, whereas the industry incurred loss of 7.6%.



Federal Realty currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Investors can also consider better-ranked stocks in the REIT space like Equity LifeStyle Properties, Inc. (NYSE:ELS) , Sunstone Hotel Investors, Inc. (NYSE:SHO) and PS Business Parks, Inc. (NYSE:PSB) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Equity LifeStyle Properties currently has a long-term growth rate of 4.7%.

Sunstone Hotel’s estimates for 2017 FFO per share moved north nearly 2.6% to $1.20, over the past 30 days.

PS Business Parks’ estimates for 2017 FFO per share inched up 1.8% to $6.09, over the past seven days.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.


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