EUR 850.00 For Business Accounts Only

Morningstar | Federal Realty’s high-quality portfolio should help it weather the retail headwinds.

Federal Realty has built an impressive track record based on a disciplined, fundamental strategy of owning attractively located shopping centers. This core, quality-focused approach has supported demand for its properties and allowed the company to capitalize on redevelopment opportunities, altogether achieving peer-leading releasing spreads and same-store income growth averaging roughly 4% over the past 10 years. But sentiment has changed in the retail sector, and technology continues to alter tenants’ decision-making, much to the dismay of landlords in the overstored U.S. Fortunately, Federal Realty's portfolio consists predominantly of high-quality properties that should be able to withstand the challenges of a significant reduction in retail real estate that we expect over the next decade. While it's important to focus on its portfolio, investors should applaud the company for the assets it did not absorb over the past several years. Firms often acquire portfolios of shopping centers and are subsequently left with bad apples in the bunch. These often create drags on their portfolios in years to come, but Federal Realty has been diligent in its growth, completing many one-off acquisitions along the way. We view this as a key factor for its current market position as competitors continue to dispose of lackluster assets at progressively higher cap rates. Federal Realty has launched several large mixed-use developments. These new retail-centric projects incorporate meaningful office, residential, and/or hotel components in an attempt to attract tenants seeking cohesive live-work-play environments. While we like the idea of this symbiotic relationship, we view it as incredibly difficult to implement across the portfolio. We don't think the company's redevelopment plans are enough to escape the shift to e-commerce and the decreasing reliance on a physical store presence. Just to be clear, we do not think physical retail is going away, but we do think the average U.S. retailer is going to be increasingly conservative when its comes to growing store count going forward, and this will be a headwind even for high-quality landlords.