Federal Realty: Up 17% and Still a Buy
- By Nathan Parsh
The last time I discussed Federal Realty Investment Trust (NYSE:FRT), the trust was coming off of a very difficult third quarter. The company's revenue and funds from operations had both declined by double-digits due to Covid-19 forcing the closure of non-essential businesses.
The trust collected just 85% of rent during the third quarter, which was a vast improvement from the prior quarter where just 68% of rent due was paid.
I said at that time that the trust's operations appeared to be improving based on rent collections and that maybe the worst was behind the business. Shares were also offering a yield that was nearly 200 basis points above the 10-year average yield, leading me to believe that investors could take advantage of the higher-than-usual yield while Federal Realty's business continued to recover from the pandemic.
Since my last discussion of the stock, Federal Realty has returned almost 17%. Let's examine the trust's most recent quarter and valuation to see why I believe it still has double-digit return potential.
Earnings highlights and valuation analysis
Federal Realty reported fourth-quarter and full-year results on Feb. 11. For the quarter, revenue declined 8.3% to $218.5 million, which was $11.6 million ahead of Wall Street analysts' expectations. Funds from operations declined 37% to 99 cents, which was 10 cents below estimates.
For the year, revenue fell 10.7% to $832 million while funds from operations decreased 29% to $4.38.
Covid-19 was a significant headwind to Federal Realty during the quarter and year as the trust dealt with store closures. The majority of the top and bottom-line declines were due to lower rent collections. The trust estimates that the pandemic impacted nearly $19 million of rent collection in the quarter, reducing funds from operations results by 25 cents. For the year, the virus lowered rent collection by almost $107 million, which decreased results by $1.40.
There were some bright spots for the trust in the fourth quarter. Rent collection was 89%, a sequential improvement from previous quarters and the best total for the whole year.
Approximately 98% of Federal Realty's retail tenants based on annualized base rents were open for business as of the end of January. All 101 properties were also open.
The trust had 92.2% of the portfolio leased with the comparable portfolio was 92.1% leased, which was a year-over-year decline of 200 and 280 basis points. On the plus side, leased properties did stabilize from the third quarter, implying that a bottom on Federal Realty's leases may have occurred.
Federal Realty signed 103 leases for 469,000 square feet of retail space with average rent per square foot growing 1% to $32.16. The trust signed 336 leased for 1.8 million square feet of retail space during 2020. Average rent per square foot increased 2.5% to $31.53.
All of these factors point to a business recovering from the pandemic. The average rent per square foot may have seen a better increase for the year compared to the quarter, but the latter had a higher figure. This could be further evidence of Federal Realty's business returning to a more normalized way of operating as tenants are willing to pay a slightly higher rent.
The trust also sold three properties for a combined $170 million during the quarter. This just adds to Federal Realty's impeccable balance sheet. At year's end, the trust had total assets of $7.6 billion, current assets of $1.2 billion and almost $800 million of cash and equivalents. Federal Realty has total liquidity of $1.8 billion and Standard & Poor's gives the trust a credit rating of A-, putting it in a strong position to weather future issues. The trust has total liabilities of $5.1 billion, but just $332 million of current liabilities. Federal Realty has no debt due within the next year and $340 million of maturing obligations in 2021.
Even after the nearly 17% return over the past few months, Federal Realty still appears to trade below its intrinsic value.
According to GuruFocus, Federal Realty has a GF Value of $112.89. Using the current price of $104.63, the stock trades with a price-to-GF Value of 0.93. The stock earns a rating of fairly valued, but shareholders would see a return of almost 8% were it to reach its GF Value.
Federal Realty, which has raised tis dividend for 53 consecutive years, yields 4%, which is almost a full percentage point above its average dividend yield since 2010. Adding in the dividend, total returns could be in the low double-digit range for the stock.
Final thoughts
Federal Realty bore the brunt of the Covid-19 pandemic. Though results were weaker for the year, the trust's business did improve throughout the end of 2020. Rent collection was strongest in the fourth quarter and nearly all tenants were open.
The market has taken these positive signs and bid up shares recently, though the stock is not up to its intrinsic value according to GuruFocus. Federal Realty still pays a higher-than-usual dividend yield and offers the potential for double-digit total returns going forward.
Considering the business is improving and the worst of the Covid-19 effects should be behind the trust, Federal Realty continues to look like a strong investment option at the current price.
Disclosure: The author has no positions in any stocks mentioned in this article.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
