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What's in the Cards for Federal Realty's (FRT) Q3 Earnings?

Zacks Equity Research

Federal Realty Investment Trust FRT is set to report third-quarter 2019 results after market close on Oct 30. 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 a positive surprise of 1.27% with respect to FFO per share. Results reflected rise in property operating income and cash-basis roll-over growth on comparable spaces.

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 0.97%. 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

Notably, the recent data from Reis shows that the vacancy rate of neighborhood and community shopping center contracted 10 basis points (bps) sequentially to 10.1% in the third quarter. Both, national average asking rent and effective rent, which nets out landlord concessions, inched up 0.3% sequentially. However, the Regional Mall vacancy rate expanded 10 bps sequentially to 9.4%. Nonetheless, rent growth was 0.2% in the quarter.

Federal Realty has 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. With superior demographics, dense population and strong household income, the company’s properties have a decent scope of enjoying solid demand.

However, mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns, with online purchases gaining precedence. 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 September-end quarter.

Moreover, 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 third-quarter revenues is pegged at $232.4 million, indicating nearly 1.2% 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 third-quarter FFO per share moved down marginally to $1.59 in two months’ time. Nevertheless, this indicates a year-over-year rise of 0.6%.

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 an Earnings ESP of -1.35%.

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:

Stag Industrial, Inc. STAG, scheduled to release earnings on Oct 30, has an Earnings ESP of +1.10% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Digital Realty Trust, Inc. DLR, slated to report third-quarter results on Oct 29, has an Earnings ESP of +2.61% and currently carries a Zacks Rank of 3.

Apartment Investment and Management Company AIV, set to release quarterly numbers on Oct 31, has an Earnings ESP of +0.6% and carries 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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