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What's in Store for Simon Property's (SPG) Q2 Earnings?

Zacks Equity Research

Simon Property Group SPG is scheduled to report second-quarter 2019 results on Jul 31, before the market opens. While the company’s results are anticipated to reflect a marginal year-over-year increase in revenues, its funds from operations (FFO) per share will likely remain unchanged.

In the last reported quarter, this Indianapolis, IN-based retail real estate investment trust (REIT) delivered a positive surprise of 0.66% in terms of FFO per share. Results highlighted elevated occupancy and leasing spread per square foot at the company’s U.S. malls and Premium Outlets.

In addition, over the trailing four quarters, the company exceeded the Zacks Consensus Estimate on three occasions and missed in the other, the average beat being 0.94%. This is depicted in the graph below:

Simon Property Group, Inc. Price and EPS Surprise

Simon Property Group, Inc. Price and EPS Surprise

Simon Property Group, Inc. price-eps-surprise | Simon Property Group, Inc. Quote

Let’s see how things are shaping up for this announcement.

Factors at Play

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.

The retail real estate market continues to be affected by store closures and is undergoing structural changes. Nonetheless, 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.

For Simon Property, adoption of an omni-channel strategy and successful tie-ups with premium retailers has been a saving grace amid this retail apocalypse. The company is actively restructuring its portfolio, aiming at premium acquisitions and transformative redevelopments. Over the past years, Simon Property has been investing billions to transform its properties focused on creating value and drive footfall at the company’s properties. The transformational plans included addition of hotels, restaurants, residences and luxury stores.

Additionally, the company is undertaking strategic measures to help online retailers fortify their physical presence, besides taking steps to support its omni-channel strategy. Simon Property is exploring mixed-use development option which has gained immense popularity in recent years as it helps catch the attention of people who prefer to live, work and play in the same area.

During the second quarter, Simon Property commenced construction to bring the AC Hotel by Marriott brand to the shopping destination — Sawgrass Mills. Slated to open in late 2020, the eight-story, 174-room hotel will be located near The Colonnade Outlets at Sawgrass Mills, close to its recent expansion. Also, the company announced the opening of boutiques by iconic luxury brand Tom Ford at two of Simon's premier properties - The Galleria in Houston and Phipps Plaza in Atlanta. Both boutiques will open by Holiday this year.

Earlier this year, Simon Property announced the beta launch of its online outlet shopping platform in a bid to lure shoppers, and boost both online and retail-store business of participating retailers. The company’s Premium Outlets enjoy solid footfall and contribute billions of dollars of sales each year. Hence, the well-planned platform can use the mall’s pre-established customer base and drive sales.

This apart, we anticipate the company to have witnessed decent leasing at its properties during the quarter to be reported. Nevertheless, implementation of such measures requires a decent upfront cost and therefore, would limit any robust growth in its near-term profit margin.

Amid these, the Zacks Consensus Estimate for second-quarter revenues is currently pinned at $1.39 billion, indicating a projected increase of 0.13% year over year.

In addition, Simon Property’s activities during the April-June quarter were inadequate to gain analyst confidence. The Zacks Consensus Estimate for FFO per share witnessed marginal downward revision over the past month and is currently pinned at $2.98. The figure also indicates no change year over year.

Here is what our quantitative model predicts:

Simon Property does not have 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 Simon Property is -0.82%.

Zacks Rank: Simon Property currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

Here are a few stocks in the retail 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:

Federal Realty Investment Trust FRT, scheduled to release earnings on Aug 1, has an Earnings ESP of +0.18% and currently carries a Zacks Rank of 2 (Buy). 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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