What’s in Store for Federal Realty (FRT) in Q2 Earnings?

Federal Realty Investment Trust FRT is set to report second-quarter 2018 results after the market closes on Aug 1. Both its revenues and funds from operations (FFO) are anticipated to experience year-over-year growth.

In the last reported quarter, this retail real estate investment trust (REIT) delivered a positive surprise of 1.33% with respect to FFO per share. Results reflected growth in revenues.

The company has a decent surprise history. In the trailing four quarters, it surpassed estimates in three while meeting in one with an average positive surprise of 1.36%. The graph below depicts the surprise history of the company:

Let’s see how things have shaped up for this announcement.

Factors to Consider

Despite several preeminent retail bankruptcy filings and record-high defaults by retail corporates, recent data from Reis shows that the national retail vacancy rate marginally increased to 10.2% in second-quarter 2018. This underlines store closures of the bankrupt toy retailer, Toys “R” Us Inc., while national average asking rents edged 0.2% higher.

Federal Realty is navigating the choppy environment by focusing on redevelopment opportunities. Amid a fast-evolving retail environment, the company is making strategic efforts to reposition, redevelop and re-merchandise its portfolio. Moreover, amid the challenges in the retail real estate market, the company is diversifying its portfolio with residential properties as well as controlling expenses, which are likely to help it achieve bottom-line growth in the to-be-reported quarter.

Amid these, the Zacks Consensus Estimate for second-quarter revenues is pegged at $228.3 million, indicating an improvement of 9.7% from the prior-year quarter. Total rental income is projected to be $221 million, up 8.3% year over year.

However, though upbeat consumer confidence and an improving economy have infused optimism into the retail market, mall traffic continues to suffer amid a 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 that are not being able 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.

Accordingly, percentage rents, which indicate additional rent based on the level of sales achieved by the tenant, are predicted to witness a decline. The Zacks Consensus Estimate of $2.38 million reflects a 14.1% decline from the prior quarter.

Moreover, Federal Realty’s activities during the quarter could not secure adequate analyst confidence. Consequently, the consensus estimate for second-quarter FFO per share remained stable at $1.53 in a month’s time. However, it indicates rise of 2.7% year-over-year.

Earnings Whispers

Our proven model does not conclusively show that Federal Realty is likely to beat earnings this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

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 Federal Realty is -0.07%.

Zacks Rank: Federal Realty’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive surprise.

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:

Extra Space Storage Inc. EXR, slated to release second-quarter results on Jul 31, has an Earnings ESP of +0.80% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chatham Lodging Trust CLDT, scheduled to release quarterly figures on Aug 1, has an Earnings ESP of +1.14% and a Zacks Rank #3.

HCP, Inc. HCP, set to report second-quarter numbers on Aug 2, has an Earnings ESP of +0.60% and carries a Zacks Rank of 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.

Wall Street’s Next Amazon

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research