Overview

Federal Realty Investment Trust (FRT-PC) is a real estate investment trust (REIT) that specializes in the ownership, management, and redevelopment of high-quality retail and mixed-use properties. The company has a diversified portfolio of 102 predominantly retail real estate projects, comprising approximately 26.2 million commercial square feet, as of March 31, 2023.

Business Overview

Despite the challenges posed by heightened inflation and rising interest rates, Federal Realty has demonstrated remarkable resilience and growth in its operations. For the full year 2023, the company reported annual net income of $236,985,000, annual revenue of $1,132,154,000, annual operating cash flow of $555,830,000, and annual free cash flow of $244,710,000.

Financials

In the first quarter of 2024, Federal Realty continued to deliver strong results, reporting funds from operations (FFO) of $1.64 per share, up 3.1% from the prior year period. This performance came in at the upper end of the company's quarterly guidance range of $1.60 to $1.65 per share. The primary drivers for the solid start to 2024 included growth in the company's comparable property portfolio, continued strength in the residential portfolio, and stronger contributions from specialty and temporary leases.

Comparable property operating income grew by 5.6% in the first quarter, with comparable minimum rents increasing by 3.6% and comparable total property revenues rising by 4.1%. The company's portfolio occupancy level also showed greater resilience than expected, with the leased rate increasing to 94.3% and the occupancy rate staying at 92%, both metrics better than forecasted.

Federal Realty's residential portfolio continued to be a source of strength, with same-store residential property operating income growth of 6% in the first quarter, driven by 5% revenue growth against 3% expense growth. The company's development projects, such as Darien residential and retail, Huntington Shopping Center, and the ongoing progress at 915 Pike & Rose Street and One Santana West, also made meaningful contributions to the quarter's results.

Liquidity

The company's balance sheet remains in a strong position, with over $1.33 billion of available liquidity from its $1.25 billion credit facility and cash on hand. Federal Realty has no material debt maturities until 2026 and has redevelopment and expansion spend remaining of only $100 million for the balance of 2024. The company's leverage metrics are also solid, with first quarter annualized net debt-to-EBITDA standing just inside 6x, targeted to improve to 5.7x by year-end 2024 and 5.5x in 2025.

Outlook

Given the strong start to the year, Federal Realty has tightened and raised its 2024 FFO guidance from $6.76 per share at the midpoint to $6.77, with a range of $6.67 to $6.87. This represents 3.4% bottom-line FFO growth at the midpoint and almost 5% at the upper end of the range, despite the realization that interest rates will likely remain higher for longer and provide greater headwinds in 2024 than originally forecast.

Recent Developments

The company's leasing activity has been a standout, with a record 567,000 square feet of comparable retail space leased in the first quarter at an average rental increase of 9% on a cash basis. New leases for comparable spaces were signed for 222,000 square feet, with an average rental increase of 20% on a cash basis, while renewals for comparable spaces were signed for 344,000 square feet at a 3% average rental increase on a cash basis.

Federal Realty's focus on high-quality, well-located retail and mixed-use properties has been a key driver of its success. The company's properties are primarily located in communities where retail demand exceeds supply, in strategically selected metropolitan markets in the Mid-Atlantic, Northeast, California, and South Florida regions. This infill nature and strong demographics of the company's properties provide a strategic advantage, allowing it to maintain relatively high occupancy and generally increase rental rates over the long term.

The company's proactive approach to leasing, which often involves leasing space well in advance of existing lease expirations or vacancies, has also been a differentiating factor. This strategy helps to improve tenant health, enhance the merchandising mix, and serves as an insurance policy against potential gaps in future cash flow.

While Federal Realty has turned down the dial on immediate development projects, the company remains focused on entitling and designing future development projects on its existing properties. The company is also actively pursuing acquisition opportunities, leveraging its operating strength, reputation, and balance sheet flexibility to source and underwrite accretive deals in its target markets.

The company's diversified tenant base, with a mix of strong national, regional, and local retailers, has also helped to mitigate the potential negative impacts of the current economic environment. Federal Realty's tenants have largely been able to pass on cost increases to their customers, and the company has not experienced any significant collectability issues outside of its historical experience or specific 2024 guidance.

Conclusion

Federal Realty Investment Trust has demonstrated its ability to navigate the challenges posed by heightened inflation and rising interest rates, delivering strong operational and financial performance in the first quarter of 2024. The company's focus on high-quality, well-located retail and mixed-use properties, proactive leasing strategies, and disciplined capital allocation have positioned it well for continued growth and success in the years ahead.