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What's in Store for Simon Property's (SPG) Q3 Earnings?

Zacks Equity Research

Simon Property Group SPG is scheduled to report third-quarter 2019 results on Oct 30, before the market opens. While the company’s results are anticipated to reflect a marginal year-over-year decrease 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 0.34% in terms of FFO per share. Results reflected increase in 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 0.42%. 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

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.

Admittedly, store closures and bankruptcies have been affecting the retail real estate market, for long, which is, in fact, undergoing structural changes. However, with retail spending being still healthy, with consumer spending increasing amid job growth, the retail real estate sector is expected to have grown at a slow yet steady pace.

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 has been actively restructuring its portfolio, aiming at premium acquisitions and transformative redevelopments. In fact, for the past years, the company has been investing in billions to transform its properties focused on creating value and drive footfall at the properties. The transformational plans include 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 third quarter, Simon Property announced the opening of Jockey International’s first-ever pop-up retail store at The Edit @ Roosevelt Field. Notably, Jockey International is the fifth retailer to enjoy occupancy of an abundantly-visible space in one of the premier centers in the United States for product testing and customers’ interaction in a new format.

Simon Property also has a solid and improving balance sheet with ample liquidity. This trend is anticipated to have continued in the third quarter as well.

Nevertheless, shift in consumers’ preferences toward online channels for purchases, bankruptcies and store closures have emerged as pressing concerns for retail REITs and Simon Property is not immune to such choppy environment.

Moreover, though the company has been striving to counter this pressure through various initiatives, implementation of such measures requires a decent upfront cost. Therefore, this is expected to have limited any robust growth in profit margins in the quarter under review.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is currently pinned at $1.4 billion, indicating a projected dip of 0.4% year over year. In addition, Simon Property’s activities during the July-September 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 $3.05. The figure also indicates no change year over year.

Here is what our quantitative model predicts:

Our proven model predicts a positive surprise in terms of FFO per share for Simon Property this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of a FFO beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Simon Property carries a Zacks Rank #3 and has an Earnings ESP of +0.28%.

Other Stocks That Warrant a Look

Here are a few other 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 +3.30% 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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