What happened
Shares of Federal Realty Investment Trust (FRT -1.76%) tumbled 16.7% in June, according to data provided by S&P Global Market Intelligence. Analysts are becoming more cautious about the shopping center-focused real estate investment trust's (REIT) near-term upside potential.
So what
Several analysts adjusted their price targets on Federal Realty last month. Truist analyst Ki Bin Kim kicked things off in early June. The analyst lowered the price target on the retail REIT from $128 per share to $125 while keeping Truist's hold rating on the stock.
Meanwhile, Credit Suisse analyst Tayo Okusanya initiated coverage on the stock last month, giving it a neutral rating and a $104 price target. On the one hand, the analyst noted that the company's expansion into mixed-use properties and its pipeline of redevelopment projects should deliver superior earnings growth compared to its peers in the shopping center sector. Further, Credit Suisse sees the potential for upside to the company's 2022 funds from operations per share estimate as it continues collecting rent deferred during the early days of the pandemic. However, the analyst also cautioned that there's some tenant credit risk if the economy weakens.
Finally, Jefferies analyst Linda Tsai lowered the firm's price target on Federal Realty from $133 a share to $96 while keeping a hold rating on the stock. That was one of several REIT price target reductions by Jefferies' analysts last month on concerns that they could underperform if there's a recession. They changed their targets on REITs that don't have rent inflation potential to offset possible occupancy challenges.
Although analysts reduced their near-term expectations for Federal Realty last month, the REIT has been an excellent long-term performer. It delivered its 54th consecutive annual dividend increase last year. That's the longest in the REIT sector and qualifies it as a Dividend King. The REIT should be able to keep growing its dividend. It continues to expand its portfolio by acquiring additional high-quality retail centers, redeveloping properties to attract new retail tenants, and adding mixed-use tenants like offices, hotels, and residential units to diversify its revenue stream.
Now what
The near-term outlook for the retail sector is growing more uncertain due to surging inflation and higher interest rates, which could cause a recession. That might force retailers to close stores, impacting rental rates and occupancy levels at Federal's properties. However, the REIT has navigated its share of recessions over the years. Add that historical success to its expansion initiatives, and it should be able to continue growing its dividend in the future even if market conditions deteriorate in the near term.
