Retail real estate investment trust (“REIT”) General Growth Properties, Inc GGP is expected to report second-quarter 2015 results on Aug 3, after the market closes. Last quarter, the company delivered in-line results.
For the trailing four quarters, General Growth Properties posted an average positive surprise of 0.78%. In fact, the stock beat the estimates on two occasions, while meeting the same on other two. The Zacks Consensus Estimate for the second-quarter funds from operations (“FFO”) per share is currently pegged at 33 cents.
Let’s see how things have shaped up for this announcement.
Factors to Consider This Quarter
General Growth Properties boasts a cluster of renowned and well-capitalized retailer tenants. During 2011–2015, the company’s FFO per share recorded a compounded annual growth rate (CAGR) of 13%, mainly driven by long-term operating leases.
General Growth Properties reported first-quarter 2015 FFO per share of 32 cents, which came a penny above the year-ago quarter figure. Results were backed by a 3.3% increase in comparable net operating income (“NOI”). For full-year 2015, management expects same-store net operating income per share to be $2.27, up from $2.20 in 2014; and FFO per diluted share to be $1.43, up from $1.32 in 2014.
The retail REIT has a solid portfolio comprising mainly Class A regional malls across prosperous locations in the U.S. that enjoys high demand from retailers. The company also reported a rise in initial rental rates for executed leases started in 2014 as well as in first-quarter 2015 (on a suite-to-suite basis) compared with the rental rates for expiring leases.
However, apart from peer rivalry, General Growth Properties also faces competition from alternative types of retailing such as catalogs and e-commerce websites. Notably, increasing consumer purchases through Internet have emerged as a pressing concern for retail REITs.
While the company strives to counter such pressure through various initiatives, we believe the implementation of such measures require a considerable upfront cost that might limit any robust near-term growth in its profit margins.
Notably, General Growth Properties’ activities during the quarter were inadequate to win analysts’ confidence. Consequently, the Zacks Consensus Estimate remained stable at 33 cents per share over the last 7 days.
Earnings Whispers
Our proven model does not conclusively show that General Growth Properties will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: The Most Accurate Estimate and the Zacks Consensus Estimate currently stand at 34 cents and 33 cents respectively, which translates into an Earnings ESP of +3.03%.
Zacks Rank #4: General Growth Properties’ Zacks Rank #4, when combined with a positive Earnings ESP, makes surprise prediction difficult.
Note that, we caution against stocks with Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
You could consider stocks in the REIT sector that have the combination of a positive Earnings ESP and a favorable Zacks Rank, and are hence poised for an earnings beat this quarter:
Hudson Pacific Properties, Inc. HPP has an Earnings ESP of +2.44% and a Zacks Rank #3. The company will report results on Aug 6.
Ashford Hospitality Trust, Inc. AHT, with an Earnings ESP of +4.35% and a Zacks Rank #1, will report results on Aug 6.
CorEnergy Infrastructure Trust, Inc. CORR, with an Earnings ESP of +29.41% and a Zacks Rank #2, is slated to report results on Aug 10.
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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