Should You Continue Holding Federal Realty Stock in Your Portfolio?

Federal Realty's FRT high-quality retail properties, located in affluent communities with strong demographic trends, provide a solid foundation for growth. Its broad tenant mix and emphasis on essential retail support consistent and stable cash flow generation.

The company’s initiatives to broaden its portfolio and expand into mixed-use developments are expected to drive long-term value. Redevelopment efforts aimed at enhancing operational efficiency are a positive sign. 

Its solid balance sheet should support future growth plans. Nonetheless, the continued rise of e-commerce presents a significant headwind, while elevated interest expenses further weigh on performance.

Although shares of this retail REIT carrying Zacks Rank #3 (Hold) have declined 17.8% in the past three months, wider than its industry’s fall of 12.8%, the recent estimate revision trend suggests an optimistic outlook from the analysts. The Zacks Consensus Estimate for its 2025 FFO per share has been revised three cents upward over the past two months to $7.16.

What’s Aiding FRT Stock?

Federal Realty’s portfolio of premium retail assets — mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles — along with a diverse tenant base, both national and local, positions it well for decent growth. The company has strategically selected the first ring suburbs of nine major high-barrier markets. The sites enjoy an average population of 173,000, with a $161,000 average household income and $10 plus billion of average aggregate income (calculated on a weighted-average basis in a three-mile radius), ensuring resilience and growth. 

With a well-located portfolio and 80% of its centers having a grocery component offering essential goods and services, FRT is poised to experience an improving leasing environment. We estimate year-over-year growth of 5.4%, 4% and 4.4% in the company’s rental income in 2025, 2026 and 2027, respectively. Also, exploring the mixed-use development option, which has gained immense popularity in recent years, will enable the company to tap into growth opportunities in areas where people prefer to live, work and play.

Federal Realty focuses on maintaining a decent balance sheet position with ample liquidity. The company exited the fourth quarter of 2024 with 123.4 million in cash and cash equivalents and $1.25 billion of total unsecured revolving credit facility. The annualized net debt-to-EBITDA ratio was 5.5 as of Dec. 31, 2024. The company has no material debt maturities until 2026. 

Solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Federal Realty remains committed. The company has paid out uninterrupted dividends since its inception in 1962, and the latest hike in August 2024 marked the 57th consecutive year of common dividend increases by the company. Moreover, backed by healthy operating fundamentals, we expect FFO to increase 7.4%, 3% and 3.4% on a year-over-year basis in 2025, 2026 and 2027, respectively. Given FRT’s solid operating platform, our FFO growth projections and balance sheet strength compared with industry counterparts, this dividend rate is expected to be sustainable in the upcoming period.

What’s Hurting FRT Stock?

The market is witnessing a shift in retail shopping from brick-and-mortar stores to Internet sales. Moreover, given the convenience of online shopping, it is likely to remain a popular choice among customers. This is expected to adversely impact the market share for brick-and-mortar stores. Further, macroeconomic uncertainty and inflationary trends could limit consumers’ willingness to spend to some extent in the coming quarters. While bankruptcy issues remain a concern, it is noted that the company has limited troubled retail exposure. 

Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Federal Realty. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. FRT has a substantial debt burden, and its total debt as of Dec. 31, 2024 was approximately $4.47 billion. Our estimate indicates a year-over-year increase of 2.3% in the company's 2025 interest expenses.

Stocks to Consider

Some better-ranked stocks from the retail REIT sector are Regency Centers REG and Tanger, Inc. SKT. Regency Centers and Tanger carry a Zacks Rank #2 (Buy) each at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Regency’s 2025 FFO per share has been revised a cent upward over the past month to $4.54.

The consensus mark for Tanger’s 2025 FFO per share has been revised three cents upward to $2.26 over the past two months.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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This article originally published on Zacks Investment Research (zacks.com).

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