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REITs Queued for Q3 Earnings on Oct 31: FRT, MAC & More

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This week will be one of the busiest in the third-quarter earnings season, with more than 900 companies reporting their results, including 140 S&P 500 members. Among these are retail REITs like Federal Realty Investment Trust FRT, Realty Income Corporation O, and Macerich Company MAC, residential REIT Mid America Apartment MAA, and healthcare REIT HCP Inc. HCP scheduled to release earnings on Oct 31.

As for apartment REITs, the Sep-end quarter proved to be an encouraging one for the U.S. apartment market. Per the latest study by the real estate technology and analytics firm, RealPage, Inc. RP, the U.S. apartment market witnessed accelerating rent growth and increasing occupancy level. In fact, rents grew at an annual pace of 2.9% in the quarter, while occupancy came in at 95.8%, up from 95.4% reported in the second quarter.

However, store closures and retailer bankruptcies continued to impact retail REITs in the third quarter as well. In fact, recent data from Reis shows that vacancy rate for regional malls jumped to 9.1% in the third quarter, from 8.6% in the prior quarter, while the same for Neighborhood and Community malls expanded 20 basis points (bps) year over year to 10.2% in the third quarter.

Although demographic tailwinds have supported performance of healthcare REITs, softness in the senior housing real estate fundamentals remained a spoilsport in the third quarter as well. Per an article by National Investment Center for Seniors Housing & Care (NIC),occupancy rate for seniors housing (including properties still in lease up) shrunk 80 basis points (bps) year over year in the quarter to 87.9%, marking the lowest dip since second-quarter 2011. Hence, surprises might be in store for some REITs, while others may disappoint this earnings season. Let’s find out by analyzing the factors that are expected to have played a key role in the above-mentioned REITs’ third-quarter 2018 performance.

Federal Realty’s revenues and funds from operations (FFO) are anticipated to reflect year-over-year growth. Notably, it is making strategic efforts to reposition, redevelop and re-merchandise its portfolio. Moreover, the company is diversifying its portfolio with mixed-use properties. Its efforts are likely to help drive the company’s bottom-line growth in the to-be-reported quarter.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $228.5 million, indicating an improvement of 4.9% from the prior-year quarter. Total rental income is projected at $225 million, up 6.1% year over year.

Nonetheless, mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns, with e-retail taking precedence. These have made retailers reconsider their footprint and eventually opt for store closures.Such an environment has also led to tenants demanding substantial lease concessions but mall landlords are finding these unjustified.

In the trailing four quarters, the company has surpassed estimates thrice and posted in-line results in the other, delivering an average positive surprise of 1.17%. The graph below depicts the same:

Federal Realty Investment Trust Price and EPS Surprise
 


Federal Realty Investment Trust Price and EPS Surprise | Federal Realty Investment Trust Quote

According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase its odds of an earnings surprise.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

In fact, the chances of the company beating the Zacks Consensus Estimate are less, although it has a Zacks Rank of 3. This is because it has an Earnings ESP of 0.00%. (Read more: What's in Store for Federal Realty in Q3 Earnings?)

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Macerich is making strategic moves to enhance its asset quality and customer relationships. The company’s increasing adoption of an omni-channel model in retailing is aimed at improving shopping experience and driving sales volume at tenant stores, thereby, spurring demand for its properties. Moreover, upbeat consumer sales and improving net absorption may aid occupancy levels.

Amid these, Macerich’s activities during the quarter have boosted analysts’ confidence. Consequently, the Zacks Consensus Estimate for FFO per share, which witnessed a marginal increase over the last 30 days, is currently pinned at $1.00. The figure also indicates nearly 4.2% year-over-year rise.

Nonetheless, retail-store rationalization and rising dominance of e-retail is expected to mar the company’s third-quarter performance. Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $217.2 million — indicating a year-over-year fall of 10.4%. Minimum rental revenues are anticipated to have registered a marginal year-over-year decline to $144 million. (Read more: Macerich to Post Q3 Earnings: A Beat in the Offing?)

Over the preceding four quarters, Macerich beat estimates in one occasion, met in another and missed in the other two, with an average negative surprise of 0.42%. This is depicted in the chart below:

Macerich Company (The) Price and EPS Surprise
 

Macerich Company (The) Price and EPS Surprise | Macerich Company (The) Quote

Also, it is well poised to beat the third-quarter FFO estimates, with a Zacks Rank of 3 and an Earnings ESP of +2.34%.

Realty Income’s third-quarter 2018 results are estimated to reflect year-over-year improvement in FFO per share and revenues. This freestanding retail REIT derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail businesses. Such businesses are less susceptible to economic recessions, as well as competition from Internet retailing.

Furthermore, focus on external growth through exploring accretive acquisition opportunities will likely have supported the company’s performance in the Jul-Sep quarter.In fact, the Zacks Consensus Estimate for third-quarter revenues is pegged at $334.2 million, indicating a year-over-year rise of 8.9%. The Zacks Consensus Estimate for rental revenues of $318 million also denotes a projected increase of 8.5% year over year. (Read more: What's in the Cards for Realty Income in Q3 Earnings?)

The company surpassed estimates in two occasions, met in another and missed in the other, over the last four quarters, resulting in an average positive surprise of 0.32%. This is depicted in the graph below:

Realty Income Corporation Price and EPS Surprise

Realty Income Corporation Price and EPS Surprise | Realty Income Corporation Quote

With a Zacks Rank of 3 and Earnings ESP of -1.61%, chances of the company beating estimates this quarter are less likely. 

Mid America Apartment is expected to witness growth in revenues in the quarter under review. In fact, the Zacks Consensus Estimate for third-quarter 2018 revenues is pinned at nearly $396 million and reflects a year-over-year improvement of 2.85%.

Nevertheless, the company has been grappling with new supply in a number of its markets, like Dallas and Washington, DC. This remains a concern as elevated levels of deliveries curtail landlords’ ability to demand higher rents and result in lesser absorption. Consequently, concession levels are likely to remain at the higher end, while the leasing environment is expected to have remained competitive in the Sep-end quarter. (Read more: Mid-America Apartment Q3 Earnings: What Lies Ahead?)

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in three occasions and missed in the other. It delivered an average positive surprise of 1.69% during this period. The graph below depicts this surprise history:

Mid-America Apartment Communities, Inc. Price and EPS Surprise
 

Mid-America Apartment Communities, Inc. Price and EPS Surprise | Mid-America Apartment Communities, Inc. Quote

With a Zacks Rank of 3 and Earnings ESP of -0.17%, chances of the company beating estimates this quarter are less likely. 

HCP Inc. is expected to have witnessed a decline in its senior housing portfolio occupancy in third-quarter 2018 due to the softness in the overall senior housing market. However, net operating income for this segment will likely be up moderately 2.3%, as compared to the prior quarter, to $37.44 million, while revenues might have remained flat at $138 million.

Also, the Zacks Consensus Estimate for rental and related revenues of $280 million indicates a year-over-year increase of 5.3%. Also, total revenues for the soon-to-be-reported quarter are projected at nearly $457.45 million — reflecting a year-over year increase of 0.76%. 

Nonetheless, a higher interest rate is likely to have raised the cost of debt, which, in turn, may have dampened the company’s profitability in the quarter. (Read more: Can Demographic Tailwinds Drive HCP's Earnings This Season?)

Over the last four quarters, this REIT exceeded estimates in each occasion, coming up with an average positive beat of 3.25%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise
 

HCP, Inc. Price and EPS Surprise | HCP, Inc. Quote

With a Zacks Rank of 3 and Earnings ESP of 0.00%, chances of the company beating estimates this quarter are less likely. 

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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RealPage, Inc. (RP) : Free Stock Analysis Report
 
Federal Realty Investment Trust (FRT) : Free Stock Analysis Report
 
Macerich Company (The) (MAC) : Free Stock Analysis Report
 
Realty Income Corporation (O) : Free Stock Analysis Report
 
Mid-America Apartment Communities, Inc. (MAA) : Free Stock Analysis Report
 
HCP, Inc. (HCP) : Free Stock Analysis Report
 
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