Here's Why You Should Retain Federal Realty (FRT) Stock Now
With robust retail real estate demand and muted new supply continuing to drive the recovery of this industry, retail real estate investment trusts (REITs) like Federal Realty FRT, Kimco Realty KIM and Regency Centers REG are well-poised to ride the growth curve.
As for Federal Realty, it owns properties 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, San Francisco and Los Angeles.
Given the strong demographics and infill nature of its properties, the company experienced decent leasing activity over the recent quarters, aiding occupancy growth. During the second quarter of 2023, it signed 112 leases for 602,911 square feet of retail space. As of Jun 30, 2023, occupancy rates in the portfolio increased 80 basis points (bps) year over year to 92.8%.
With consumer spending expected to remain healthy amid the rebounding retail real estate industry, we expect FRT to continue witnessing decent leasing activity in the forthcoming quarters. For 2023, our estimate for the leased occupancy rate is pegged at 94.3%.
The company enjoys a well-diversified tenant base of retailers, including industry bellwethers like TJX Companies, Kroger and CVS Corporation. This minimizes the risks related to any particular retail industry and assures a stable source of rental revenues. As of Jun 30, 2023, no single tenant accounted for more than 2.70% of the annualized base rent (ABR), and the top 25 tenants accounted for only 24.45% of the ABR. For 2023, we estimate the company’s rental income to grow 4.9% year over year.
Federal Realty’s efforts to diversify its portfolio with residential and office properties are likely to pay off well. Exploring the mixed-use development option, which has gained immense popularity in recent years, will enable the company to tap growth opportunities in areas where people prefer to live, work and play. Moreover, its expansion efforts into the premium markets and initiatives to redevelop and repurpose its assets seem encouraging.
As of the end of the second quarter of 2023, Federal Realty had redevelopment projects underway throughout the portfolio with a projected total cost of approximately $228 million, which it expects to stabilize over the next several years.
On the balance sheet front, this retail REIT exited the second quarter of 2023 with $1.3 billion of total liquidity and an annualized net debt-to-EBITDA ratio of 6.0. It also enjoys credit ratings of BBB+ and Baa1 ratings from Standard & Poor's and Moody's, respectively, rendering it access to the debt market at favorable costs. Hence, with a solid financial footing, FRT seems well-placed to bank on long-term growth opportunities.
Nonetheless, given the conveniences of online shopping, growing e-commerce adoption may weigh on the prospects of Federal Realty, Kimco and Regency Centers. Online retailing will likely remain a popular choice among customers, thus adversely impacting the market share for brick-and-mortar stores.
Amid persistent macroeconomic uncertainty and a high interest rate environment, a slowdown in the economy and the depletion of savings could limit consumers’ willingness to spend to some extent in the coming quarters, stalling the company’s growth tempo to some extent. Also, the likelihood of tenant bankruptcies in the near term could affect FRT’s profitability and hurt occupancy.
Further, given the prevailing high interest rate environment, Federal Realty may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. We anticipate a year-over-year rise of 20.7% in the company’s interest expenses in the current year.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Kimco Realty Corporation (KIM) : Free Stock Analysis Report
Federal Realty Investment Trust (FRT) : Free Stock Analysis Report
Regency Centers Corporation (REG) : Free Stock Analysis Report
