Company Reports

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

Federal Realty Investment Trust's fourth-quarter results were slightly better than we anticipated, giving us confidence in our $142 fair value estimate for the no-moat company. Same-store occupancy improved 20 basis points sequentially to 94.0%, in line with our estimate. Re-leasing spreads were 11.5% in the fourth quarter, slightly better than our estimate of new rent being 9.9% higher than prior rent terms. Same-store revenue grew 2.5% while same-store operating expenses declined 0.4%, leading to same-store net operating income growth of 4.0%, ahead of our 2.3% estimate. Federal Realty reported funds from operations of $1.64 per share in the fourth quarter, $0.02 better than our $1.62 estimate and $0.06 better than the $1.58 the company reported in the year-ago quarter.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

Federal Realty reported third-quarter results that were slightly better than we anticipated, giving us confidence in our $142 fair value estimate for the no-moat company. Same-store occupancy fell 10 basis points sequentially and declined 40 basis points year over year to 93.8%, worse than our estimate of 94.2% occupancy for the quarter. However, re-leasing spreads came in at 10.7% well above our estimate of 7.9% re-leasing spreads. As a result, same-store revenue grew 3.2% in the third quarter, in line with our estimate of 3.3%. However, operating expenses only grew 2.1%, below our estimate of 4.2% growth, which led to 3.8% same-store net operating income growth that exceeded our estimate of 1.1% growth. Federal reported funds from operations of $1.65 per share in the third quarter, two cents better than our $1.63 estimate and six cents better than the $1.59 figure the company reported in the third quarter of 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

Second-quarter results for Federal Realty were relatively in line with our expectations, giving us confidence in our $139 fair value estimate for the no-moat company. Same-store occupancy fell 10 basis points sequentially to 93.9%, slightly worse than our 94.3% estimate. However, re-leasing spreads were 6.8% in the second quarter, slightly better than our 6.3% estimate, as rent to new tenants was up 13.3% over prior lease terms. Federal reported same-store revenue growth of 2.2% in the second quarter, which was in line with our estimate. Same-store operating expenses grew 4.0% in the quarter, leading to same-store net operating income growth of just 1.4%, which missed our estimate of 3.2% growth. However, the second quarter of 2022 benefited from additional lease termination fee income and the collection of prior rents owed from the pandemic, so excluding these nonrecurring items, comparable NOI was up 4.6%, beating our estimate. Federal reported funds from operations of $1.67 per share in the second quarter, $0.02 better than our estimate and $0.02 better than the $1.65 figure the company reported in the second quarter of 2022.

Federal Realty reported first-quarter results were in line with our expectations, leading us to reaffirm our $139 fair value estimate for the no-moat company. Same-store occupancy fell 30 basis points sequentially to 94.0%, in line with our estimate, but was still up 20 basis points year over year. Total re-leasing spreads for the company were up 11.3% as tenants renewing their leases saw rent terms increase 13.6% in the quarter. While same-store revenues only increased 2.0% in the first quarter, same-store operating expenses fell 1.4%, leading to same-store net operating income growth of 3.6% that was in line with our 3.7% estimate. Funds from operations increased 5.9% year over year to $1.59 per share, relatively in line with our $1.60 estimate.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

Fourth-quarter results for no-moat Federal Realty Investment Trust were in line with our expectations, leading us to reaffirm our $139 fair value estimate. Same-store occupancy improved 10 basis points sequentially and 40 basis points year over year to 94.3%, in line with our estimate. Federal Realty reported the strongest total re-leasing spreads in over two years with new rents 9.9% higher than prior terms, better than our estimate of a 5.4% spread. Same-store revenue was up 5.8%, and same-store net operating income was up 5.4% in the fourth quarter, in line with our estimate of 5.0% same-store NOI growth. As a result, funds from operations grew 7.2% in the fourth quarter to $1.58 per share, which matched our estimate.

Federal Realty reported third-quarter results that were slightly better than our estimates, leading us to reaffirm our $139 fair value estimate for the no-moat company. Same-store occupancy improved 20 basis points sequentially and 110 basis points year over year to 94.2%. Total re-leasing spreads slowed to just 2.9% in the quarter, below our estimate of 6.6% blended re-leasing spreads. Same-store revenue grew 5.5% in the third quarter. However, same-store operating expenses were up 9.5%, leading to same-store net operating income growth of 3.7%, though that was ahead of our 1.8% same-store NOI growth estimate for the quarter. As a result, Federal Realty reported third-quarter funds from operations of $1.59 per share, which beat our estimate of $1.55, and was ahead of the $1.51 figure the company reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

Second-quarter results for no-moat Federal Realty Investment Trust were mixed compared with our expectations, though we don’t see anything in the quarter that would materially change our $138 fair value estimate. Same-store occupancy improved 40 basis points sequentially to 94.0%, in line with our estimate. Total re-leasing spreads were below our expectations at just 4.6%; while lease renewals were up 3.7%, higher than Federal’s recent average, the company saw rents on leases to new tenants go up just 5.6% in the quarter, below the company’s historical average. Still, same-store revenue was up 6.8% in the second quarter. Combined with same-store operating expense growth of just 3.7%, same-store net operating income grew 8.2%, though that is slightly below our estimate of 10.9% growth. Despite lower same-store NOI growth than we anticipated, funds from operations came in ahead of our expectations at $1.65 per share, better than our $1.56 estimate.

No-moat Federal Realty reported first-quarter results that were slightly ahead of our expectations for the quarter. However, given that our full-year estimates are near the high end of management’s guidance range for 2022, we don’t anticipate making any material changes to our $138 fair value estimate. Same-store occupancy sequentially improved 10 basis points to 93.6% and is now up 170 basis points year over year. Re-leasing spreads were up 7.2% in the first quarter, in line with our estimate. Same-store revenue was up 10.3% largely due to fewer required rent abatements in the quarter and Federal Realty collecting approximately $5 million of previously owed rent. Meanwhile, same-store operating expenses only increased 2.5%, leading to same-store net operating income growth of 14.5% that was largely in line with our estimate of 15.3% growth in the quarter. Despite Federal Realty reporting same-store growth in line with our expectations, funds from operations came in at $1.50 in the quarter, 8 cents higher than our estimate, due to higher growth from stabilizing properties and higher than anticipated tenant recovery revenue.

Federal Realty is a retail-based real estate investment trust that focuses on owning and operating high-quality shopping centers and mixed-use assets in eight of the largest metropolitan areas. It has strategically acquired and developed assets in submarkets with strong demand drivers, creating a portfolio with average location population density and median household income higher than any other retail REIT. As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades. Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

REITs are a favored investment for income-oriented investors due to the high dividend payments they provide shareholders. In order to maintain REIT status, REITs must pay 90% of net income to shareholders as dividends each year. However, a REIT will often record several large non-cash items in its net income like depreciation that make the required dividend payment significantly lower than the actual cashflow the company receives. Therefore, income-oriented investors should pick a REIT that pays a high dividend beyond the required minimum. Unfortunately, choosing an appropriate REIT investment is more difficult than just choosing the REIT with the highest dividend yield. A high dividend yield could be a sign that a management team is dedicated to paying a high dividend as a percent of total cashflow to shareholders. However, a company will see an increase to its dividend yield when the stock price falls. If the company's stock price is falling because the outlook for cashflow growth is lower or potentially negative, then the company may not be able to support the current dividend payment and a high dividend yield might be a sign that a dividend cut is looming for the company.

Fourth-quarter results were slightly ahead of our expectations for no-moat Federal Realty, leading us to reaffirm our $136 fair value estimate. Same-store occupancy sequentially improved 80 basis points to 93.5%, better than our 93.1% estimate for the fourth quarter. Re-leasing spreads remained positive at 5.7%, though that is slightly worse than our 7.5% estimate and marks the third straight quarter of decelerating re-leasing spreads. Same-store revenue was up 8.8% while same-store operating expenses, which saw a slight decline in real estate taxes, were only up 4.5%, leading to same-store net operating income growth of 11.2% in the fourth quarter that beat our estimate of 9.1% growth. As a result, Federal Realty reported funds from operations of $1.47 per share for the quarter, slightly better than our $1.45 estimate and 49% higher than the $0.99 figure the company reported in the fourth quarter of 2020.

We are increasing our fair value estimates for no-moat Federal Realty to $136 from $122, for no-moat Kimco Realty to $26.50 from $21, and for no-moat Regency Centers to $75 from $66. While the pandemic posed a significant threat to brick-and-mortar retail, retailers are seeing very strong sales growth in 2021. Many sales shifted online early in the pandemic as people stayed at home and avoided public spaces, leading to significant e-commerce sales growth at the expense of brick-and-mortar sales. However, the negative impact of the pandemic on brick-and-mortar retail disappeared in the second half of 2020. While foot traffic was down in 2020, consumers were spending more per ticket due to extra income from the government stimulus checks and due to less competition for disposable income from travel and experiences. In 2021, foot traffic returned to prepandemic levels while spending levels remained high, leading to double-digit growth in brick-and-mortar sales in each of the first three quarters of 2021.