Federal Realty Earnings: Solid Net Operating Income Growth Once Nonrecurring Items Removed

Second-quarter results for Federal Realty FRT 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.

Management raised the low-end of its 2023 FFO guidance by $0.08 to a new range of $6.46 to $6.58 for the year. Given that our $6.56 estimate is still within but near the high end of the updated guidance range, we don’t anticipate making any significant changes to our 2023 estimates. Still, we have greater confidence in our estimates now that our estimate is closer to the midpoint of management’s guidance range.

Federal issued $350 million of unsecured notes at 5.375% in the second quarter. The company then used the proceeds to pay off the $275 million 2.75% unsecured notes that matured during the quarter. While the debt swap raised the company’s overall average rate of debt to 4.13%, we are pleased to see that Federal is still able to issue at rates below our long-term debt assumption of 5.8% for the company.