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What's in the Cards for Federal Realty's (FRT) Q4 Earnings?

Zacks Equity Research

Federal Realty Investment Trust FRT is set to report fourth-quarter and full-year 2019 results after market close on Feb 10. Both its revenues and funds from operations (FFO) are anticipated to reflect marginal year-over-year growth.

In the last reported quarter, this retail real estate investment trust (REIT) delivered an in-line performance in terms of FFO per share. Results reflected rise in property operating income and cash-basis rollover growth on comparable spaces.

Over the last four quarters, it surpassed estimates on two occasions and reported in-line results in the other two, the average positive surprise being 0.48%. 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 are shaping up for this announcement.

Factors that Might Have Influenced Q4 Performance

For Federal Realty, the company’s portfolio of premium retail assets, along with a diverse tenant base, both national and local, positions it well for decent growth. With superior demographics, dense population and strong household income, the company’s properties have a decent scope of enjoying solid demand.

However, though upbeat consumer confidence and a healthy economy have infused optimism into the retail market, mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns with online purchases growing by leaps and bounds. These have made retailers reconsider their footprint and eventually opt for store closures. Further, retailers unable to cope with competition are filing bankruptcies. This has emerged as a pressing concern for retail REITs like Federal Realty, as the trend is curtailing demand for the retail real estate space considerably. Such events are likely to have affected the company’s performance in the December-end quarter.

In fact, store closures and bankruptcies have been affecting the retail real estate market, for long, which has been undergoing structural changes. In addition, the recent data from Reis shows that the retail and the Mall vacancy rates both increased in the quarter. Particularly, the retail vacancy rate inched up 0.1% to 10.2% in the fourth quarter. Further, retail rent growth was just 0.1%, while mall rents remained flat.

Furthermore, amid fast-evolving retail environment, Federal Realty is undertaking concerted measures to reposition, redevelop and re-merchandise its portfolio. Although repositioning and redevelopment are a strategic fit for long-term growth, such initiatives involve considerable upfront costs, tend to drag down near-term profitability, and might have curbed the company’s growth tempo in the quarter.

Amid these, the Zacks Consensus Estimate for quarterly revenues is pegged at $238.4 million, indicating a 1.3% rise from the year-ago reported figure.

However, Federal Realty’s activities during the quarter did not win analyst confidence. In fact, the consensus estimate for fourth-quarter FFO per share moved down marginally to $1.60 in a month’s time. Nevertheless, this indicates a year-over-year rise of 1.9%.

For 2019, Federal Realty expects FFO per share of $6.16-$6.22. Excluding the charge related to the buyout of the Kmart lease at Assembly, the company estimates FFO per share of $6.32-$6.38. The Zacks Consensus Estimate for the same is currently pinned at $6.35, indicating a 1.9% projected increase year on year on revenues of $934.3 million.

Key Developments in Q4

In December, Federal Realty announced that it has sold under threat of condemnation a portion of San Antonio Center, in Mountain View, CA, for $155 million. A school will be constructed by the Los Altos School District on the 11.7-acre sold land. The regional shopping center, aggregating 35 acres, was acquired by the company in 2015 for $62.2 million.

Additionally, in November, Federal Realty announced the acquisition of a 147,000-square-foot grocery-anchored neighborhood shopping center — Georgetowne Shopping Center — in Brooklyn, NY. The company has shelled out $83.7 million in cash to buy this surfaced-parked shopping center on 9 acres in Brooklyn's Georgetown neighborhood. The move comes as part of the company’s growth endeavors through portfolio expansions in locations that exhibit solid demographics and high barriers to entry. The company also plans to enhance the property value over time through continued remerchandising and space lease up with the possibility of augmenting square footage.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Federal Realty this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Federal Realty carries a Zacks Rank #4 (Sell) and Earnings ESP of -1.09%.

Stocks That Warrant a Look

Here are a few 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:

Healthpeak Properties, Inc. PEAK, slated to release fourth-quarter earnings on Feb 11, has an Earnings ESP of +1.15% and carries a Zacks Rank of 3, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vornado Realty Trust VNO, set to report quarterly numbers on Feb 18, has an Earnings ESP of +5.62% and carries a Zacks Rank of 3, currently.

Host Hotels & Resorts, Inc. HST, scheduled to release October-December quarter results on Feb 19, has an Earnings ESP of +1.52% and currently holds a Zacks Rank #3.

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

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