Federal Realty Earnings: Small Occupancy Decline Caused by Bed Bath & Beyond Vacating Anchor Spaces

Federal Realty FRT 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 reported decline in occupancy is due to Bed Bath & Beyond vacating the remaining anchor spaces. Management stated that Bed Bath & Beyond moving out caused a 100-basis-point decline in occupancy during the quarter, more than the 40-basis-point year-over-year decline reported by the company. Meanwhile, small shop occupancy, which excludes anchor spaces, increased 80 basis points year over year during the quarter. Given that management has received interest from multiple sources for the vacated anchor space, we believe that the occupancy decline should be temporary and that the company will eventually return to occupancy near 95%.

Management raised the low end of its 2023 funds from operation guidance by four cents to a new range of $6.50 to $6.56. Given that the company has reported an FFO of $4.91 year-to-date, that implies the fourth quarter should range between $1.59 and $1.65, which puts our $1.65 fourth-quarter estimate at the high-end of management’s guidance range.