On Jul 17, 2013, we reaffirmed our long-term recommendation on Federal Realty Investment Trust (FRT) – a retail real estate investment trust (:REIT) – at Neutral. The decision was based on improved performance of the company’s same-center portfolio and strategic buyouts completed in the past quarters.
However, significant development and redevelopment pipelines, and stiff competition from public and private retail developers somewhat dent the company’s growth and pose a drag on earnings.
Federal Realty’s Class A shopping centers portfolio, which is located in 20 upscale U.S. markets, has enabled the company to charge higher rental rates and steadily maintain the upward trend. In addition, the company has a diversified tenant base comprising grocery stores and low-end discount retailers – such as Wal-Mart Stores Inc. (WMT) and The TJX Companies, Inc. (TJX) – that have fared well post recession. Moreover, the company’s successful expansion strategy has long-term value potential and promises steady income growth.
However, Federal Realty’s active development and redevelopment pipelines expose it to various risks such as rising construction costs, entitlement delays and lease-ups. Additionally, the company faces intense competition from other local and national retailers. This remains a plausible concern for the company, going forward.
Over the last 60 days, the Zacks Consensus Estimate for 2013 funds from operations (:FFO) per share moved north 0.2% to $4.59. Also, for 2014, it upped 0.2% to $4.88. Thus, Federal Realty now carries a Zacks Rank #3 (Hold).
Federal Realty is scheduled to report second-quarter 2013 earnings on Aug 1, 2013, after the closing bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter results is pegged at $1.13 per share. The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Federal Realty is negative 0.89% for the second quarter. This, along with its Zacks Rank #3 reduces the chances of a positive earnings surprise.
Other Stock to Consider
Retail REITs that are currently performing better include The Macerich Company (MAC), which has a Zacks Rank #2 (Buy).
Note: 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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