Federal Realty Investment Trust (NYSE: FRT) is one of the largest retail real estate investment trusts (REITs) in the U.S. today. The retail giant is facing a new set of challenges, as it tries to compete with the rise of e-commerce in a new covid-19 era. While many believe retail is dying, Federal Realty believes buying preferences are simply changing, and those who can adapt are able to continue to prosper.
Share prices for Federal Realty Trust are nearing pre-pandemic levels, as the company has shown promising signs toward recovery and growth, but here's a closer look at if it's a buy in today's market.
Making a comeback after a tough run
Federal Realty Investment Trust owns, leases, and manages 105 open-air shopping centers and mixed-use retail centers in high-density major metro markets, including cities like New York, Miami, Los Angeles, Boston, Chicago, and Philadelphia, among others.
Considering the nature of the company's business, it comes as no surprise to hear that the pandemic has negatively impacted performance. Net income was $44.2 million, a 417% jump from the same quarter 2020. Earnings per share and funds from operation (FFO) increased 418% and 83% year over year, respectively.
And while 2021 is proving to be a much stronger year for the company, earnings aren't at pre-pandemic levels. As of July 28, 2021, rental collections, not including deferral payments, were at 94% with 100% of its properties being open. Thankfully, the company is in a fairly stable financial position with no major debt maturities until 2023 and $1.3 billion in cash and cash equivalents, including its access to credit facilities.
Retail is definitely struggling, but I think it's far from dead, and it's clear FRT believes that too. The company recently acquired a 110,000-square-foot shopping center in Fairfax, Virginia, the fifth acquisition in 2021. The property, which is grocery-anchored, is currently 86% occupied, leaving room for the company to add value through remerchandising and incremental capital investment.
Additionally, Federal Realty Trust has 10 redevelopment projects underway, with $107 million to be allocated to the properties over the next three years, with the primary focus of expansion and driving revenues for investors.
The company prides itself on its consistent dividend payouts, having 54 years of consecutive dividend increases. Q3 2021, the company raised its dividend payments by $0.01, a slight increase but understandable given the financial challenges it's encountered over the past year. The increase brings dividend payouts to 76%, a healthy ratio that can definitely be sustained based on its current income and debts.
Bargain buy is long gone
Share prices plummeted at the start of the pandemic and are just now nearing pre-pandemic levels, a sign that investor confidence is slowly returning. But the company has actually performed fairly well given the circumstances. Federal Realty isn't the bargain buy it was even just a few months ago, but the increase in share value is reflective of the forward momentum it's seeing and is well deserved considering the quality of the company's portfolio.
Its next earnings, which is set to be released November 4, 2021, will provide better insight into the impacts of the delta variant. There's a chance much of the progress that's been achieved over the past two quarters could be erased. Personally, I believe the company has a challenging quarter or two ahead, but it's showing positive signs toward recovery and growth. So, for investors looking for a fairly competitive but reliable return backed by a high-quality portfolio and strong management team, Federal Realty Trust is a buy.
However, investors should be aware of the challenges retail operators face today and be comfortable with the risk that comes with this. The pandemic was a prime example of how vulnerable this sector is to changing consumer patterns, which isn't likely to slow anytime soon. It seems Federal Realty Trust is up and open for the challenge, adapting quickly to meet consumers' changing preferences while still delivering for its investors, but that could change moving forward.