Federal Realty’s FRT portfolio of premium retail assets in well-off communities with favorable demographics positions it well for growth. A diverse tenant base and a focus on essential retail ensure steady and stable cash flows.

Efforts to diversify its portfolio and develop mixed-use assets are likely to benefit the company over the long term. Moves to improve operating performance through redevelopment are encouraging. A healthy balance sheet will likely aid its growth endeavors.

However, higher e-commerce adoption remains a major concern. High-interest expenses add to its woes.

What’s Aiding FRT Stock?

Federal Realty’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, both national and local, positions it well for decent growth. The company has strategically selected the first-ring suburbs of nine major high-barrier markets. The sites enjoy 173,000 of the average population, with a $161,000 average household income and $10-plus billion of average spending power (calculated on a weighted-average basis in a three-mile radius), ensuring resilience and growth.

With a well-located portfolio and 80% of its centers having a grocery component offering essential goods and services, FRT is poised to experience an improving leasing environment. We estimate year-over-year growth of 5.9%, 4.7% and 3.9% in the company’s rental income in 2024, 2025 and 2026, respectively. Also, exploring the mixed-use development option, which has gained immense popularity in recent years, will enable the company to tap into growth opportunities in areas where people prefer to live, work and play.

Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited the third quarter of 2024 with $1.35 billion of total liquidity in cash and credit facility. The annualized net debt-to-EBITDA ratio was 5.5 as of Sept. 30. The company has no material maturities until 2026.

Solid dividend payouts are arguably the biggest enticement for REIT shareholders and Federal Realty remains committed. The company has paid out uninterrupted dividends since its inception in 1962, and the latest hike in August marked the 57th consecutive year of common dividend increases by the company.

Moreover, backed by healthy operating fundamentals, we expect FFO to increase 6.1%, 6% and 4.3% on a year-over-year basis in 2024, 2025 and 2026, respectively. Given the company’s solid operating platform, our FFO growth projections and balance sheet strength compared with industry counterparts, this dividend rate is expected to be sustainable in the upcoming period.

What’s Hurting FRT Stock?

The market is witnessing a shift in retail shopping from brick-and-mortar stores to Internet sales. Given the convenience of online shopping, it is likely to remain a popular choice among customers. Consequently, this is expected to adversely impact the market share for brick-and-mortar stores. Further, macroeconomic uncertainty and a still high interest rate environment could limit consumers’ willingness to spend to some extent in the coming quarters.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Federal Realty. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate.

The company has a substantial debt burden, and its total debt as of Sept. 30, 2024, was approximately $4.47 billion. Our estimate indicates a year-over-year increase of 6.2% in the company's 2024 interest expenses.

Shares of this retail REIT carrying Zacks Rank #3 (Hold) have lost 6.5% over the past three months, wider than its industry’s decline of 3.3%. Also, the recent estimate revision trend does not suggest an overtly positive outlook from the analysts, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share being kept unrevised at $6.79 per share while the same for 2025 being lowered marginally to $7.15 over the past month.

Image Source: Zacks Investment Research

Stocks to Consider

Some better-ranked stocks in the retail REIT sector are Kimco Realty Corporation KIM and Regency Centers Corporation REG, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Kimco’s 2024 funds from operations (FFO) per share has moved marginally upward over the past two months to $1.64.

The consensus mark for Regency Centers’ 2024 FFO per share has moved a cent upward over the past two months to $4.28.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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

To read this article on Zacks.com click here.

Zacks Investment Research