It seems like all REITs have been tapping the preferred market to raise funds recently. Low rates and perpetual capital combine to make an issuers day. Most recently, Kimco Realty (KIM) issued perpetual preferreds at 5.50% following Vornado's (VNO) 5.70% preferred issuance. The streak was finally broken today when Federal Realty Investment Trust (FRT) issued ten year bonds via Citigroup, Wells Fargo and RBC Capital Markets.
Details of the offering are:
| Issuer | Federal Realty Investment Trust |
| Rating | Baa1/BBB+/A- |
| Coupon | 3.00% (priced to yield 3.14%) |
| Pricing | $98.743 or +170/10yr |
| Maturity | August 1, 2022 |
| Ranking | Senior Unsecured |
| Size | $250,000,000 |
| CUSIP | 313747AS6 |
One of the advantages of REIT debt securities is that they contain financial covenants - possibly the only investment grade sectors/issuers to offer financial covenants. The covenants contained within the FRT debt are:
- Debt/Total Assets < 60%
- Secured debt/Total Assets < 40%
- Income available for debt service/Debt service > 1.5x
- Unencumbered assets/Unsecured debt > 150%
Issuer Description
Federal Realty Investment Trust is an equity REIT specializing in the ownership, management and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, as well as in California. As of March 31, 2012, FRT owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 87 predominantly retail real estate projects comprising approximately 19.2 million square feet. In total, the real estate projects were 93.8% leased and 92.6% occupied at March 31, 2012. A joint venture in which the REIT owns a 30% interest owned seven retail real estate projects totaling approximately 1.0 million square feet as of March 31, 2012 and was 87.8% leased and occupied.
As of 3/31/2012, Federal realty's capital structure was as follows:
Debt
Federal Realty's debt does not trade often, and that is partially due to the amount outstanding and partially due to REIT debt being held by investors due to the spread versus comparably rated debt.
The REIT's debt distribution is as follows:
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Federal realty's debt distribution is manageable and is not outside the ability of the company to repay/refinance when due.
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Looking at the debt of peers Kimco Realty , Simon Properties (SPG) and Regency Centers (REG), Federal Realty's new issue appears to have some value. It is important to note that the KIM '17s have no REIT covenants and should trade wide on that basis as well as their underperformance.
Equity
Looking at Federal Realty's equity versus peers Kimco Realty, Regency Centers and Kite Realty (KRG), one can see the premium to NAV afforded the company due to their consistent dividends, steady growth and performance and strong management.
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Bottom Line: Federal realty Investment Trust is one of the higher rated REITs with a conservative balance sheet and a proven track record of success. While 3.14% may not seem all that attractive on the surface, an investor is getting strong management, and a stable operating history and financial profile at +170/10yr. I view this as an attractive spread for the company, although higher spreads are available in the Kimco complex (which may be somewhat hard to source). The equity has been a strong performer and has paid a consistent dividend, but prices are somewhat frothy and I might look to a higher beta name for upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.
