Zacks_Analysts' Blog : Federal Realty Stays Neutral - Analyst Blog

We reiterate our Neutral recommendation on Federal Realty Investment Trust. (FRT) as we expect the stock to perform in line with the broader market. The company reported second quarter 2011 FFO (funds from operations) of $64.3 million or $1.02 per share compared with $60.3 million or  98 cents per share in the year-earlier quarter.

Funds from operations, 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.

Rockville, Maryland-based Federal Realty Investment Trust specializes in owning, managing, developing, and redeveloping retail, mixed-use and street-retail properties, primarily in densely populated locations. Its community and neighborhood shopping centers are anchored by supermarkets, drug stores or high-volume, value-oriented retailers, which provide consumer necessities.

Federal Realty owns Class A shopping centers in high income, infill areas of the country, with assets primarily located in Washington DC, Boston, Philadelphia, and California. This provides significant upside potential for the company, with retailers being more selective about expansion and favoring high-barrier, high-growth areas, which  fare relatively better.

The possibility of store closings at various Federal Realty centers due to lease terminations create uncertainties and will also induce the company to re-let large big box spaces at significantly lower rents amidst a very tough leasing environment. This affects the company’s top-line growth and puts considerable pressure on its sustainability.

Federal Realty has a strong balance sheet and has paid uninterrupted dividend since its inception. Further, the company has increased its dividend to 69 cents per share or $2.76 on an annualized basis. For full-year 2011, Federal Realty increased its earlier FFO guidance from $3.95 – $4.02 per share to $3.99–$4.04 per share.

Federal Realty currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Acadia Realty Trust (AKR) also holds a Zacks #3 Rank.