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Can Federal Realty (FRT) Beat Estimates in Q2 Earnings?

Zacks Equity Research

Federal Realty Investment Trust FRT is set to report second-quarter 2019 results after market close on Aug 1. Both its revenues and funds from operations (FFO) are anticipated to witness year-over-year growth.

In the last reported quarter, this retail real estate investment trust (REIT) delivered a positive surprise of 0.65% with respect to FFO per share. Results reflect rise in property operating income and lease rollover for comparable properties.

The company has a decent surprise history. Over the last four quarters, it surpassed estimates on three occasions and reported in-line results in the other, the average positive surprise being 0.98%. The graph below depicts the surprise history of the company:

Federal Realty Investment Trust Price and EPS Surprise

Federal Realty Investment Trust Price and EPS Surprise

Federal Realty Investment Trust price-eps-surprise | Federal Realty Investment Trust Quote

Let’s see how things have shaped up for this announcement.

Factors at Play

With a portfolio of premium retail assets, mainly situated in the major coastal markets from Washington, DC to Boston, San Francisco and Los Angeles, and a diverse tenant base, Federal Realty is well poised for growth in the to-be-reported quarter. Backed by superior demographics with dense population and strong household income, the company’s properties are likely to have witnessed healthy occupancy level and rental rates in the second quarter.

In addition, the recent data from Reis shows that the vacancy rate of neighborhood and community shopping center contracted 10 basis points sequentially to 10.1% in the second quarter, denoting its first decline since first-quarter 2016. The Regional Mall vacancy rate was flat in the second quarter at 9.3%. Store closures continue to affect Regional Mall vacancy. Nonetheless, both, national average asking rent and effective rent, which nets out landlord concessions, inched up 0.4% sequentially and 1.7% from the year-ago quarter.

Obviously, the retail real estate market continues to be affected by store closures and is undergoing structural changes. However, the latest stability in the vacancy rate and rent levels underlines that the sector has been able to battle such challenges as retail landlords continued their transformation initiatives, while there is minimal construction activity in the pipeline. Moreover, low unemployment, increasing wages and decent consumer sentiment are positive indicators for the retail industry.

Amid fast-evolving retail environment, Federal Realty too is undertaking concerted measures to reposition, redevelop and re-merchandise its portfolio. The company is also focused on mixed-use properties, aiming to lure those customers who prefer to work, live and stay in the same area.  Its decent balance-sheet position with ample liquidity also supports its growth endeavors.

Amid these, the Zacks Consensus Estimate for second-quarter revenues is pegged at $233.8 million, indicating nearly 4% rise from the year-ago reported figure.

However, Federal Realty’s activities during the quarter did not secure adequate analyst confidence. In fact, the consensus estimate for second-quarter FFO per share moved down marginally to $1.58 in a month’s time. Nevertheless, this indicates a year-over-year rise of 1.94%.

Here is what our quantitative model predicts:

Federal Realty has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: The Earnings ESP for Federal Realty is +0.49%.

Zacks Rank: Federal Realty carries a Zacks Rank #3, currently.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Other Stocks That Warrant a Look

Here are a few other stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Regency Centers Corp. REG, scheduled to release earnings on Aug 1, has an Earnings ESP of +0.10% and currently carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tanger Factory Outlet Centers, Inc. SKT, set to report quarterly results on Jul 31, has an Earnings ESP of +1.23% and carries a Zacks Rank of 3, at present.

Realty Income Corporation O, slated to report second-quarter results on Aug 5, has an Earnings ESP of +0.78% and holds a Zacks Rank of 3, currently.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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