Federal Realty Trades at a Premium
Federal Realty (FRT) is one of the best-positioned strip mall Real Estate Investment Trusts (REITs), with top assets in high growth areas of the country that will fare better in the continued economic downturn. We rate FRT a Hold due in part to valuation and economic uncertainty. Consumer spending patterns have been flat this year and 2008 is shaping up to be a bad year for retail operators.
FRT reported funds from operations [FFO] of $0.94 per share, $0.01 below our estimates and consensus. The miss was primarily due to legal fees. Operationally, the company's portfolio continues to perform at a high level. Rental growth on new/renewal leases continues to accelerate and overall portfolio occupancy is still above 95%.
FRT is currently underway with six redevelopment initiatives with total projected expenditures of approximately $163 million. Redevelopment, which creates attractive yields in an otherwise difficult acquisition and development environment, has become a larger driver of the company's growth. We expect this to continue going forward.
We expect the company to continue increasing rents at a healthy pace as leases roll, although occupancies should continue to drift downward throughout the year. We are setting our price target to $78.00 per share or 20x 2008 FFO estimates, which puts the company at an approximate 36% premium to peers that we cover.
Many Reasons to Sell H&R Block
We maintain our Sell rating for H&R Block, Inc. (HRB). Although we believe that the company has taken substantial steps in the right direction, we feel that the recent increase in the stock price has been overdone.
Given the current business outlook, as well as the possibility that the company may face additional political-related risks going forward, we do not believe that the current valuation is warranted. Our price target of $20 reflects a multiple of approximately 14x our fiscal 2009 EPS estimate.
Our outlook for the business services industry is neutral. But we expect strong growth in the outsourcing industry over the next three-to-five years.
H&R Block is the largest provider of tax preparation services in the world. H&R Block is also leveraging its strong position and customer relationships in tax preparation to build out its investment and financial services businesses.
On June 3, the Attorney General of Massachusetts has filed suit against HRB. The suit alleges that the company engaged in unfair and deceptive conduct on a broad scale. We believe that the suit provides evidence that the operational difficulties and potential financial fallout resulting from the company's mortgage operations may continue to be a factor going forward.
Currently, the shares trade at approximately 16.2x our 2008 EPS estimate. Additionally, the Office of Thrift Supervision has terminated the prior regulatory requirement that HRB maintain 3% adjusted tangible capital at the parent company level at all times. We view the development favorably.
We expect that the company's share price may be subject to political-related pressures going forward. The presumptive Presidential nominees of both major political parties have stated an intention to simplify the tax code. Any such measures would, in our opinion, likely put pressure on HRB's operations and share price.
Esterline Entering Upcycle
The aerospace/defense sector -- of which Esterline Technologies (ESL) is part -- is entering the sweet spot of this cycle. Commercial deliveries of new models have yet to start in earnest, while deliveries of more mature marks continue apace.
Further, maintenance, repair and overhaul (MRO) of both commercial and, especially, military equipment is at a heightened level, which engenders a vibrant after-market.
