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Will E-Retail Impact Federal Realty's (FRT) Q3 Earnings?

Federal Realty Investment Trust FRT is set to report third-quarter 2017 results after the market closes on Nov 1. Both its revenues and funds from operations (FFO) are anticipated to experience solid year-over-year growth.

Last quarter, this retail real estate investment trust (REIT) delivered a positive surprise of 2.1% with respect to FFO per share. Results indicated growth in revenues and same-center property operating income.

The company has a decent surprise history. Over the trailing four quarters, it surpassed estimates in three occasions and missed in the other. This resulted in an average positive surprise of 0.9%. The graph below depicts the surprise history of the company:

Note: All EPS numbers presented in this write-up represent funds from operations (FFO) per share.

However, Federal Realty’s shares have descended 14.5% year to date, against the industry’s decline of 8.9%.

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

Factors to Consider

Federal Realty has been taking advantage of the redevelopment opportunities. Particularly, amid a fast evolving retail environment, the company is making strategic efforts to reposition, redevelop and re-merchandise its portfolio.   

These efforts will not only help the company counter competition from e-retailers but will also enable it to post decent operating results in the to-be-reported quarter. 

Subsequently, minimum rents from the retail and commercial segment will likely record year-over-year growth. The Zacks Consensus Estimate of $148 million indicates encouraging growth of 8% as compared to the year-ago quarter. Furthermore, total rental income is projected to be $209 million, a marginal rise from the prior-quarter tally of $204 million.

However, rising consumer purchases through the Internet has emerged as a pressing concern for this REIT. These have made retailers reconsider their footprint and eventually opt for store closures. Also, retailers not able to cope with competition have been filing bankruptcies.

Accordingly, percentage rents, which indicate additional rent based on the level of sales achieved by the tenant, are predicted to witness a considerable decline due to the tepid retail environment. The Zacks Consensus Estimate of $2.44 million reflects a 5.2% dip as compared to the prior-year quarter.

Prior to the third-quarter earnings release, there is lack of any solid catalyst for becoming optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the third quarter edged down 0.7% to $1.47 over the past two months.

Earnings Whispers

Our proven model does not conclusively show that Federal Realty will likely beat on 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.

Zacks ESP: The Earnings ESP for Federal Realty is -0.92%.

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 an earnings beat.

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

EPR Properties EPR,slated to release third-quarter earnings on Nov 8, has an Earnings ESP of +0.93% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

BostonProperties, Inc. BXP,scheduled to report its numbers on Nov 1, has an Earnings ESP of +0.5% and a Zacks Rank of 3.

Paramount Group, Inc. PGRE, set to release third-quarter figures on Nov 6, has an Earnings ESP of +3.77 and a Zacks Rank of 3.

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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Federal Realty Investment Trust (FRT): Free Stock Analysis Report
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Paramount Group, Inc. (PGRE): Free Stock Analysis Report
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