EUR 850.00 For Business Accounts Only

Morningstar | Federal Realty Reports Solid Fundamentals and an FFO Beat for 2Q

Federal Realty reported a solid second quarter that was just below our view on fundamentals but above on execution of development opportunities, leading us to confirm our $117 fair value estimate and no-moat rating. Occupancy increased year over year 40 basis points to 94.1%, and the percentage of the portfolio leased increased year over year by 20 basis points to 95.5%. Releasing spreads were up 10%, which represents another strong quarter with double-digit spread on signed leases but slightly below our 13% estimate and down from the 16% spread signed on all leases over the prior 12 months. Comparable property net operating income was up 3.6%, slightly below our 4.2% comparable NOI growth estimate. However, the company generated more revenue from its acquisition, development, and redevelopment properties than we expected, leading to total property NOI slightly above our expectations. The company reported funds from operations of $1.55 per share for the quarter, which was 4% above our estimate for the quarter, and narrowed its 2018 FFO guidance to a new range of $6.13 to $6.23 for the year.

After producing comparable property NOI growth of 3.8% in the first quarter and 3.6% in the second quarter, Federal Realty brought up its full-year comparable property NOI growth guidance to 3% from a range of 2% to 3%. However, even the upward revision implies that the second half will slow down significantly compared with the strong results of the first half of the year. The company expects the third quarter to be the weakest of the year as Federal had a really good third quarter in 2017 that creates a tough comp. Additionally, the closing of a Toys R Us in its Escondido property in California will be a drag in the third quarter. However, Federal Realty has already released this property to Bob's Furniture at double the prior rents. The fourth quarter could be a bounce-back quarter when this tenant, along with a few other recently signed tenants, physically take their space and begin paying rent, and the company expects that NOI growth will come back up close to the level of the past two quarters. We think that the results in the first half of 2018 will be very hard to replicate going forward given the headwinds facing physical retail, but we do think that 3% NOI growth for the year is easily achievable for Federal Realty given the results it's already baked in for the year.