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What's in Store for Federal Realty (FRT) This Earnings Season?

Federal Realty Investment Trust FRT, a leading real estate investment trust (REIT) focused on retail properties, is set to report its third-quarter earnings for 2023 on Nov 2 after market close. In anticipation of the announcement, industry analysts and investors are eager to assess the company's performance and prospects in the current economic climate.

In the last reported quarter, this retail REIT reported a surprise of 3.09% in terms of FFO per share. Results reflected healthy leasing activity and occupancy levels at its properties.

Over the last four quarters, Federal Realty surpassed estimates on all occasions, the average beat being 2.06%. 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 and EPS Surprise

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

In this article, we will dive deep into the U.S. retail real estate market environment and the company's fundamentals and analyze the factors that may have contributed to its third-quarter 2023 performance.

US Retail Real Estate Market in Q3

Per a report from CBRE Group (CBRE), retail fundamentals showed an ongoing improvement in the third quarter. Particularly, retail space demand in the third quarter increased, with net absorption rising 34% quarter over quarter to 9.8 million square feet. Specifically, street retail, freestanding & other segments observed the most net absorption of 4.3 million square feet. While net absorption for neighborhood, community and strip centers fell 29% quarter over quarter, power center and lifestyle and mall segments turned positive after recording negative net absorption in the second quarter.

In addition, amid elevated construction costs and tight lending conditions, total new retail space delivered fell 28% sequentially to just under 5.6 million square feet. This represented the second-lowest total on record.

The overall availability rate in the third quarter fell 10 basis points (bps) to 4.8%, marking at least an 18-year low per the CBRE report. Neighborhood, community and strip centers witnessed the largest year-over-year decline in availability, down 50 bps to 6.6%.

The overall retail asking rent reached $23.42 per square foot, with the asking rent growth falling to just more than 2.1% on a year-over-year basis. This was mainly an indication that landlords are expecting demand to ease in the forthcoming quarters amid the likelihood of the U.S. economy slowing down.

Factors to Note

Federal Realty is expected to have gained from the resurgence in the retail real estate sector. The company possesses a collection of high-quality retail properties, primarily positioned in major coastal markets spanning from Washington, D.C. to Boston, San Francisco and Los Angeles. FRT’s properties are strategically located in the first-ring suburbs of major metropolitan markets of the United States, aiding its third-quarter cash flows.

Due to strong demographics and the prime location of its properties, the company has consistently upheld a high occupancy rate over the years. FRT's diverse mix of retail tenants is anticipated to have contributed to stable rental income during the third quarter. Our estimation places FRT's leasing rate at 94.1%, while rent per square foot is projected to grow 2.8% year over year. Furthermore, Federal Realty's strong financial position likely facilitated its development endeavors in the third quarter.

FRT's strategic focus on mixed-use properties enables the company to benefit from multiple revenue streams. By combining residential, retail and office spaces, these properties attract a variety of tenants, creating a vibrant, bustling atmosphere that draws in consumers. This diversification is likely to have played a crucial role in FRT's third-quarter 2023 performance as it insulates the company from the fluctuations and uncertainties of a single sector.

Projections for Q3 2023

The Zacks Consensus Estimate for quarterly revenues is pegged at $285.13 million, calling for a 4.27% increase from the year-ago period. The consensus mark for rental revenues is pegged at $285.22 million, suggesting a rise from the year-ago period’s $273.18 million.

Rental income from minimum rents — commercial — is presently pegged at $186.24 million, up from $179.22 in the year-ago period. Rental income from cost reimbursements is projected at $53.34 million, up from $50.22 million in the prior-year period.

Federal Realty’s activities during the soon-to-be-reported quarter were not adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the third-quarter FFO per share has been unrevised at $1.62 over the past month. However, it suggests a 1.89% increase year over year.

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 an FFO beat. However, that’s not the case here.

Federal Realty currently carries a Zacks Rank #3 and has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are two stocks from the retail REIT sector — Phillips Edison & Company, Inc. PECO and Tanger Factory Outlet Centers, Inc. SKT — that you may want to consider as our model shows that these have the right combination of elements to report a surprise this quarter.

Phillips Edison & Company is slated to report quarterly numbers on Oct 31. PECO has an Earnings ESP of +0.43% and carries a Zacks Rank of 3 presently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tanger Factory Outlet Centers, scheduled to report quarterly numbers on Nov 6, has an Earnings ESP of +1.41% and carries a Zacks Rank of 2.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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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Federal Realty Investment Trust (FRT) : Free Stock Analysis Report

Tanger Factory Outlet Centers, Inc. (SKT) : Free Stock Analysis Report

Phillips Edison & Company, Inc. (PECO) : Free Stock Analysis Report

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