Federal Realty Earnings: Double-Digit Re-Leasing Spreads and Solid Growth in Line With Expectations

Federal Realty FRT 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.

Despite Bed, Bath, and Beyond’s bankruptcy announcement during the quarter, Federal expects little impact from the anchor’s store closings on 2023 results. Management has credit reserves built into its guidance with between 25 basis points and 60 basis points specifically allocated to the tenant. Therefore, management feels comfortable with its current same-store NOI guidance of 3% to 5% for 2023, which is above our 2.9% estimate for the year. Management also commented on the call that it is already working on deals for new tenants to take all nine anchor spaces. Given that Bed, Bath, and Beyond was only paying base rent of $15 per square foot, management believes that the company could see higher revenues once new tenants take over the space in late 2024. This is in line with our thesis that retailer bankruptcies, as long as they don’t happen all at once, can be a long-term positive for high-quality retail spaces given that you can bring in healthier tenants that can support higher rents to replace struggling tenants paying lower rent.