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 is likely to aid its growth endeavors. However, higher e-commerce adoption remains a major concern. High interest expenses add to its woes.

Recently, as part of a strategic step in fortifying its portfolio, Federal Realty acquired a 47-acre, grocery-anchored lifestyle center, Del Monte Shopping Center, in Monterey, CA, for $123.5 million. This acquisition adds approximately 674,000 square feet of retail space to Federal Realty’s portfolio and underscores its commitment to owning and operating high-quality, high-traffic retail properties in affluent markets.

Premier retail destination of the Monterey Peninsula, Del Monte Shopping Center is strategically positioned on Highway 1, which serves as the primary corridor for commerce and commute in the region. Within a 15-mile radius, the property is the most visited retail center in the region and serves a trade area of more than 225,000 residents. According to Placer.ai, its annual foot traffic puts it in the top 5% of all shopping centers in the country. Del Monte Shopping Center is currently 83% leased, anchored by Whole Foods and features high-performing retailers.

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 aggregate income (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 5.4%, 4% and 4.4% in the company’s rental income in 2025, 2026 and 2027, 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 fourth quarter of 2024 with 123.4 million in cash and cash equivalents and $1.25 billion of total unsecured revolving credit facility. The annualized net debt-to-EBITDA ratio was 5.5 as of Dec. 31, 2024. The company has no material debt maturities until 2026. Federal Realty’s credit ratings of BBB+ (Stable) and Baa1 (Stable) from Standard & Poor's and Moody's, respectively, enable it to procure debt financing at a favorable cost.

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 2024 marked the 57th consecutive year of common dividend increases by the company. Moreover, backed by healthy operating fundamentals, we expect FFO to increase 7.4%, 3% and 3.4% on a year-over-year basis in 2025, 2026 and 2027, respectively. Given FRT’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.

Although shares of this retail REIT carrying Zacks Rank #3 (Hold) have declined 9.5% so far in the year, wider than the REIT and equity trust retail industry’s fall of 2.6%, the recent estimate revision trend suggests an optimistic outlook from the analysts. The Zacks Consensus Estimate for its 2025 FFO per share has been revised three cents upward over the past month to $7.16.

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What’s Hurting FRT Stock?

The market is witnessing a shift in retail shopping from brick-and-mortar stores to Internet sales. Moreover, given the convenience of online shopping, it is likely to remain a popular choice among customers. This is expected to adversely impact the market share for brick-and-mortar stores. Further, macroeconomic uncertainty and inflationary trends could limit consumers’ willingness to spend to some extent in the coming quarters.

Despite the Federal Reserve announcing rate cuts late in 2024, 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 Dec. 31, 2024, was approximately $4.47 billion. Our estimate indicates a year-over-year increase in the company's 2025 interest expenses.

Other Stocks to Consider

Some better-ranked stocks from the retail REIT sector are Regency Centers REG and Tanger, Inc. SKT, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Regency’s 2025 FFO per share has been revised four cents upward over the past month to $4.53.

The consensus mark for Tanger’s 2025 FFO per share has been revised a cent upward to $2.26 over the past week.

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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This article originally published on Zacks Investment Research (zacks.com).

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