Benzinga  Jun 25  Comment 
Investor sentiment toward the retail industry has improved, and one analyst says Federal Realty Investment Trust (NYSE: FRT)’s valuation makes the stock a buy at current levels. The Analyst D.A. Davidson analyst James Lykins upgraded Federal...


Rockville, Maryland-based Federal Realty Investment Trust (FRT) is an equity based real estate investment trust that owns and operates retail properties. Its community and neighborhood shopping centers are often anchored by supermarkets, drug stores and high-volume retailers which sell consumer necessities. Federal concentrates on densely populated, affluent communities, which minimizes competition from outlet stores and big box retailers such as Wal-Mart Stores (WMT). This focus on high-density areas has two other advantages – occupancy rates in FRT’s properties are high, at about 97% in 2007, and there are barriers to entry in these locations in the form of high real estate costs that minimize competition.

Federal's industry peers consist of other retail REITs such as Regency Centers (REG), Kimco Realty (KIM),Developers Diversified Realty (DDR), and Weingarten Realty Investors (WRI). Federal operates fewer properties than its competitors, and operates in a more concentrated geographic area. It is in the middle of the pack in terms of its 2007 revenues and current market capitalization, however, suggesting its average retail center is larger and more profitable than those of its peers.

Business Financials

Rental income accounts for the vast majority of FRT’s operating revenue (96.4% of total property revenue in 2007.)[1] Rental income includes a base rental fee, percentage of tenant's sales and cost recoveries from tenants. Increases in rental income come from three main sources: purchasing new properties ($32 million increase 2006-2007), increasing income from existing properties ($11.6M increase 2006-2007) and redeveloping properties ($8.9M increase 2006-2007).[2]

By purchasing new properties, FRT increases its gross leasable area and is able to generate more rental revenues. Increases in rental income from existing properties happen when FRT gains additional tenants, increases its rental rates, or both. FRT is able to increase rental rates by releasing space at higher rates as current tenant's leases expire or from fixed increases in rental rates stipulated in rental agreements. By redeveloping properties, FRT is able to increase rental rates and increase occupancy as the quality of its facilities improves, also leading to higher rental income.

In the charts below, FRT's properties are broken down by state, and their revenues and operating income are compared for the last five years. These charts suggest FRT maintains a significant geographic focus, with over half its GLA in just three states. FRT has also seen steady increases in both revenue and operating income, with operating income remaining at an approximate constant of 40% of revenues for the period. This suggests FRT is expanding but realizing little in the way of economies of scale from that expansion.

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Trends and Forces

Inability To Obtain Financing Caused By The Credit Crunch Could Impede FRT's Growth.

  • As a Real estate investment trust FRT is required to pay out 90% of its taxable income in dividends. This requirement makes it unlikely FRT can fund all its growth from operating income. To finance growth the company must also rely on debt or equity capital. If the company is unable to obtain financing at favorable rates, it may not be able to fund expansion.
  • Because of potential buyers' inability to obtain financing due to the credit crunch, FRT may see its assets become more and more illiquid - a lack of lending creates a lack of able buyers, which makes it more difficult for FRT to sell its properties. If FRT is unable to sell its under-performing or redevelopment properties, it may find itself unable to fund expansion or meet its debt obligations. One troubling statistic is FRT's 30.44% assets to liabilities ratio as of 2007. This statistic measures a company's ability to meet all upcoming debts with cash on hand, and FRT's low ratio means that its debt will only deepen as it must borrow more money to pay off existing loans.

Interest Rate Fluctuations Decrease FRT's Stock Price, But Have Little Effect on Its Outstanding Debt

  • As interest rates rise, FRT sees a decrease in its stock price as alternative investments provide greater Return on investment (ROI). This occurs because as rates rise, fixed income instruments such as bonds provide higher returns. Since investors are able to earn a higher risk-adjusted return on fixed income instruments, they shift their investment out of Federal's stock and into these fixed income products. When the number of people wishing to hold Federal's stock decreases, the stock price falls.
  • As of December 31, 2007 FRT had about $1.6B in outstanding debt, of which $1.4B was fixed rate debt.[5] Because FRT has minimal variable rate debt, it faces little risk from interest rate shifts on its existing debt. However, rising interest rates make it more costly for FRT to issue more debt, as they will have to provide a higher return. Since FRT relies on new debt to fund its expansion, higher interest rates are an obstacle to the firm's growth.

U.S. Economic Cycles Might Lead To Decreased Revenues

  • FRT’s properties consist primarily of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for FRT’s properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for FRT's properties. This poses a significant risk as FRT has leases on 39% of its gross leasable area (GLA) expiring by 2011.[6] If, when these leases expire, FRT offered discounted rents on properties to increase occupancy levels during an economic down cycle, the effects would likely be seen over a number of years. Leases with smaller tenants usually last for at least a few years, and leases with anchor tenants (Large stores which occupy a significant portion of a property's GLA) can last much longer. If these leases were signed when rents were lower, FRT will see lower income over the life of the lease.
  • Any change in general economic conditions on a national, regional, or local scale which adversely affects FRT’s tenants will decrease the amount of base rent, expense reimbursement and overages FRT receives from its tenants, as all of these are tied to tenant performance. Furthermore, if during a down economic cycle any of FRT's tenants become insolvent, they may choose not to honor their leases.
  • By diversifying its tenant base, FRT is insulated against the risk that a single tenant leaving its properties would leave the company insolvent. As of December 31, 2007 no single tenant accounted for more than 2.5% of base rent.[7]

Increasing Competition From Discount Stores Could Adversely Affect Anchor Tenant's Ability to Meet Lease Obligations

  • FRT operates neighborhood and community shopping centers, which are facing increasing risk from outlet stores, discount stores, and other retailers(Wal*Mart's Impact). As these competitors gain market share, it could adversely impact the ability of FRT’s tenants to pay rent, and decrease FRT’s collections of base rents, expense reimbursements and overages.
  • Currently only 5% of FRT's properties have a Wal-Mart operating in the same area.[8] However, Walmart is currently developing a new, smaller, grocery based store aimed specifically at the kind of affluent areas where FRT operates its properties.[9] If Wal-Mart Stores (WMT) were to enter these markets it could have adverse consequences for FRT's anchor tenants. FRT's anchors, which focus on consumer staples, compete directly with these Wal-Mart Stores (WMT).
  • Anchor tenants commonly occupy a large percentage of gross leasable area and pay a substantial portion of base rent at FRT's properties. In addition, they bring foot traffic to the property benefiting smaller tenants. Should an anchor tenant cancel their lease or become insolvent, not only would FRT lose the base rent, overages, and expense reimbursements, but its smaller tenants would suffer from the decreased foot traffic. Leases for smaller tenants in a retail center often contain clauses allowing for lease terminations or rent reductions if an anchor tenant leaves the property.[10] If an anchor tenant left the property, smaller tenants may choose to simply cancel their leases rather than wait for FRT to locate a new anchor.


FRT competes with numerous other firms to both acquire properties and lease tenants. The table below lists other national retail real estate investment trusts that directly compete FRT. FRT has much more of a geographic focus than any of its competitors, all its properties span just 13 states, and 94% of its total GLA is located in just 8 states.[11] FRT also operates significantly fewer properties than its competitors. FRT is much more comparable to its competitors in terms of 2007 revenues and market cap, suggesting its properties are larger and more profitable than those of its competitors.

The table below provides competitive data comparing FRT with some of its close competitors.

Company Revenues (12/31/2007, Millions) Market Cap(Billions, 04/05/08) Operating Properties Number of States With Operating Properties
Federal Realty Investment Trust (FRT) 485.89 [12] 4.80 [13] 82 [14] 13 [15]
Kimco Realty (KIM) 681.55 [16] 10.33 [17] 946 [18] 45 [19]
Developers Diversified Realty (DDR) 944.85 [20] 5.31B [21] 740 [22] 45 [23]
Weingarten Realty Investors (WRI) 599.05 [24] 3.12 [25] 383 [26] 22 [27]
Regency Centers (REG) 451.51 [28] 5.00 [29] 232 [30] 23 [31]

Market Share

In 2007 FRT's market share among global Retail REITs was just 2%. Market share is listed by Funds From Operations (FFO), a metric that takes into account earnings from existing properties but not cash from acquisitions or sales of assets. Globally there are 38 REITs focusing on retail properties producing an aggregate $10.0B in FFO.[32][33]] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000.

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2007 Data[34][35]
  • General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.[36]
  • Westfield Group ((WDC) is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom, valued at $53.2 billion.[37]
  • Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.[38]
  • Simon Property Group (SPG) develops and leases regional malls, shopping centers and strip malls. Simon Property Group owns or has an interest in over 379 properties comprising over 256 million square feet of gross leasable area across investments in the U.S., Europe, and Asia,[39] making it the largest public U.S. real estate company.[40] Simon Property Group's investments tend to be in large metropolitan areas with very high consumer traffic and are comprised of anchor department stores alongside smaller retailers.


  1. 2007 10K Page 40
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  3. 2007 10K Page 18
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  6. 2007 10K Page 19
  7. Company Website
  8. Akash, Dave; Morningstar Analyst Note, 08/02/2007
  9. McWilliams, Garcy "Walmart Eyes Smaller and Higher End Stores"; Reclaim Democracy 08/17/2007
  10. 2007 Annual Report, Page 8
  11. 2007 10K
  12. Google Finance
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  33. [2007 Company Annual Reports]
  34. Datamonitor Industry Market Research: Global - Retail REIT's
  35. [2007 Company Annual Reports]
  36. VNO Company Site - About Us
  37. Westfield Group company website - Company Profile
  38. Kimco Company Website - About Kimco
  39. Simon Property Group company website - About Us
  40. Simon Property Group company website - About Us
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