Federal Realty Investment Trust announced yesterday that it plans to split itself in two, spinning its Main Street-style properties off to shareholders while negotiating to sell its strip shopping centers to an unidentified investor.
The announcement came after traders last week sent the Rockville company's stock climbing about 10 percent on rumors that there was a merger or similar transaction in the offing. Like that of many other real estate investment trusts (REITs), Federal Realty's stock has been sagging this year even though its underlying commercial real estate business is healthy.
Yesterday, the stock closed at $23, off 93 3/4 cents, in New York Stock Exchange trading. Debt-rating company Moody's Investors Service Inc. put the company's credit rating under review "with direction uncertain."
"We really have been running two businesses here," said chief executive Steven J. Guttman. The company's 60 strip shopping centers, such as Congressional Plaza in Rockville, are generally established properties with stable income streams. The Main Street properties--stores in affluent pedestrian shopping areas such as Bethesda--are a higher-risk business, in part because many of them are unfinished. The stock market, Guttman said, has been undervaluing his company and other REITs. "We thought it made sense as a way to maximize shareholder value," he said of the planned split.
Analysts said that it was difficult to evaluate the sale and spinoff because the company made so little information available, particularly on the identity of the would-be purchaser. Federal Realty said the purchaser has offered "a combination of cash and securities" worth about $18 a share, or $728 million, and would assume "a significant portion" of the company's $800 million in debt. Exact terms, the company said, are still under discussion.
"It's a little difficult to come to any hard and fast decision at this time because we don't know who the purchaser is going to be," said Kevin Comer, an analyst at Deutsche Banc Alex. Brown Inc. If the would-be buyer is a strong public company, he said, its stock could be valuable for currency for Federal Realty shareholders, but if it's a weak company, the opposite is true.
On the Main Street side, Federal Realty will be creating a company with several dozen existing properties throughout the country similar to its Bethesda Row, which is anchored by Barnes & Noble and Giant Food. That company will also include about $500 million in property under development. Federal Realty's current shareholders will receive the new firm's stock by year-end.
Comer said his "very rough back-of-the-envelope estimate" values the new spinoff at $7 to $8 a share.
Unlike its parent, the Main Street retail spinoff would not be a REIT, which is a type of real estate company that does not pay federal taxes at the corporate level, but must pay almost all its earnings out as dividends. Instead, it would be organized as a standard C-corporation. That will enable it to reinvest earnings rather than rely on the stock market to raise capital.
This and other aspects of the Federal Realty deal means it is significant beyond the single company, said analyst David Fick of Legg Mason Wood Walker. "It's very meaningful to the . . . industry because it's essentially a company saying the REIT capital marketplace isn't working anymore," he said.