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Don't Sell Federal Realty's (FRT) Stock Now: Here's Why

Zacks Equity Research

Federal Realty Investment Trust FRT, similar to other retail real estate investment trusts (REIT), has been facing low demand for its real estate amid a rising trend in online purchases. Hence the company has been capitalizing on expansion opportunities in premium markets to support its operating performance.

Specifically, Federal Realty has been actively investing in assets, which generates income growth and creates long-term value. Also, the company sells its non-core assets and redeploys the proceeds toward strategic growth schemes to facilitate this. It has been bolstering its bottom line through expansion, renovation and re-tenanting efforts.

In fact, on Aug 3, Federal Realty announced the closing of a new joint venture with Los Angeles-based owner and developer of premier retail properties — Primestor Development Inc. The venture is seeded with a full interest in five dominant community shopping centers, in addition to one center under redevelopment, as well as a 25% minority stake in a seventh shopping center. The company has around 90% stake in the venture.

In order to cushion itself from short-term market swings, Federal Realty signs long-term leases with annual bumps. On a comparable-space basis (spaces for which a former tenant was there), the company leased 397,555 square feet of space, at an average cash-basis contractual rent escalation of 13%. Rent increases (on a straight-line basis) for comparable retail space averaged 27% for second-quarter 2017. In addition, the upscale geographic location of the company’s properties and the diversified tenant base of retailers help it enjoy a stable source of rental revenues.

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

Although Federal Realty’s improving development and redevelopment pipeline is encouraging for its future growth, it increases the company’s operational risks by exposing it to escalating construction costs, entitlement delays and lease-up risks.

Shares of Federal Realty have underperformed its industry year to date, declining 9.7% compared with the industry’s plunge of 5.6%. Further, the Zacks Consensus Estimate for fourth-quarter 2017 funds from operations (FFO) per share has been revised 0.7% downward to $1.50 in a month’s time.

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

Stocks to Consider

A few better-ranked stocks in the REIT space include Getty Realty Corporation GTY, Seritage Growth Properties SRG and American Asset Trust, Inc AAT.

While Getty Realty and Seritage sport a Zacks Rank #1 (Strong Buy), American Asset Trust carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Getty Realty’s 2017 FFO per share estimates moved up 7.8% to $1.94 in the past 60 days.

Seritage’s 2017 FFO per share estimates inched up 0.5% to $2.01 in a month’s time.

American Asset Trust’s 2017 FFO per share estimates climbed 1% to $2.01 over the past 60 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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