This month's REIT Focus is on Federal Realty Investment, Trust, Inc. (FRT). FRT is a self-administered and self managed Maryland real estate investment trust that focuses on the ownership, operation and development of retail real estate properties. FRT owns approximately 19.3 million square feet of retail space, located primarily in strategically selected metropolitan markets in the Northeast, Mid-Atlantic, and California.
In addition, FRT has an ownership interest in approximately 1 million square feet of retail space through a joint venture in which it has a 30% interest. FRT was founded in 1962 and is based in Rockville, MD. As of 2/14/12, the average occupancy and monthly rental rate were, 93.3% and $27, respectively. Also, as of 2/14/12, FRT had 63.5 million shares outstanding, a stock price of $97/sh. (a 52 week high) and a market capitalization of approximately $6.2 billion.
Select financial data for FRT as of the 9/30/11 10Q for the period 1/1-9/30/11 is as follows (in thousands where applicable):
|Real Estate Assets, Gross||$4,025,000|
|Mortgages, Notes Payable and Senior Notes||$1,731,000|
|Earnings Per Share||$1.80|
|Cash Flow from Operations||$173,000|
|Revolving Credit Facility ($242 million available)||$400,000|
|Market Capitalization (equity value only)||28%|
|Real Estate Assets Per Square Foot||$208|
|Dividend Yield ($2.76/sh)||2.90%|
|NOI and Value Calculation:|
|Revenues/Income Per Above Annualized||$551,000|
|Less: Rental and Operating Expenses||($196,000)|
|Projected Inflation Rate||103.5%|
|Projected NOI for 2012||$367,000|
|Projected Cap Rate||7.5%|
|Projected Value of Portfolio||$4,893,000|
|Less: Total Debt & Preferred Stock||($1,741,000)|
|Projected Value of Company Equity||$3,152,000|
|Projected Value Per Share||$50|
|Market Price Per Share (1/14/12)||$97|
As shown above, our value for FRT is $50 per share versus a market price of $97 per share. A portion of the value difference can be attributed to annualizing the September 30th income and expenses and projecting a forward one year net operating income. The market, however, is valuing the company at a cap rate of approximately 4.6% which we believe is way too rich for a shopping center owner. Our cap rate of 7.5% is in line with the average cap rate for retail properties per the Jones Lang LaSalle Retail Survey for the third quarter of 2011.
FRT is considered a well managed REIT with a solid portfolio of community and neighborhood shopping centers. We believe that the market price of the company's stock at $97/sh. is too expensive for investment even though it currently yields 2.9%.
This is our ninth REIT Focus review (see below) and almost all of the stock prices at the time of review equated to cap rates of 4%-5.7%. We believe that funds are flowing into the REIT sector for the dividend yield, which currently averages 4.34% across all REIT stocks as fixed income rates are near zero. These momentum fund flows have pushed prices up to dangerous levels, even though most of the REITs have good growth prospects. The question for investors is: do future growth prospects in NOI, justify a skimpy 4.6% cap rate?
REIT Focus reviews in prior issues of VOM are as follows:
1. BRE Properties, Inc., June 15, 2011
2. Boston Properties, Inc., July 15, 2011
3. Simon Properties Group, Inc., August 15, 2011
4. First Industrial Realty Trust, September 15, 2011
5. Public Storage, October 15, 2011
6. Ashford Hospitality Trust, Inc., November 15, 2011
7. AvalonBay Communities, Inc., December 15, 2011
8. Alexandria Real Estate Equities, Inc., January 15, 2012