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Factors Influencing Regency's (REG) Fate in Q3 Earnings

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Regency Centers Corp. (REG - Free Report) is slated to report third-quarter 2020 earnings on Nov 5, after market close. The company’s funds from operations (FFO) per share and revenues are anticipated to have declined year over year.

In the last reported quarter, this Jacksonville, FL-based retail real estate investment trust (REIT) posted 2020 NAREIT FFO per share of 61 cents that missed the Zacks Consensus Estimate of 78 cents. Results reflected a decline in same property net operating income (NOI) due to higher uncollectible lease income related to the coronavirus pandemic.

Further, the company beat the Zacks Consensus Estimate in two of the trailing four quarters, missed in one and matched the other, the average negative surprise being 4.2%. This is depicted in the graph below:

Factors to Note

The pandemic and related lockdown measures have added to apprehensions of retail landlords who were already grappling withbankruptcy impact. In fact, despite retail sales rebounding to the pre-COVID levels driven by improvement in consumer sentimentduring the July-September period, per a report from CBRE Group, the total retail availability rate expanded 20 basis points (bps) to 6.6% in the quarter. This marks the third consecutive quarter of a rise in availability and indicates the weakening retail real estate fundamentals.

Evidently, negative net absorption aggregated nearly 15 million square feet. This was primarily in the neighborhood, community & strip center segment, and represented the largest decline since the first quarter of 2009. Also, construction completions of less than 6 million square feet marked the lowest quarterly total ever recorded.

Further, full-service restaurants, fitness centers and movie theaters continue to be severely affected by the pandemic. While experience-based retail tenants continued to impact retail REITs, Regency’s essential tenancy-oriented centers are expected to have sailed through these testing times.

Notably, as of second-quarter end, the company’s properties had 43% essential retail and services tenancy. This has enabled its properties to remain open, operating for the entirety of the pandemic. In fact, as of July end, 95% of its tenant operations (based on pro-rate ABR) were open, increasing from around 75% in May.

Moreover, through Jul 31, 2020, the company had collected 75% of July pro-rata base rent (79% when including executed rent deferral agreements).

However, leasing velocity is expected to have remained at depressed levels in the third quarter, due to the pandemic-led decline in demand. This might have affected occupancy rates and tenant reimbursements for the quarter under review. 

Additionally, Regency’s tenants with non-essential businesses are expected to have struggled with their operations, impairing their ability to pay rent obligations. As a result, the company is likely to have witnessed a rise in uncollectable lease income for the third quarter.

Moreover, a high number of bankruptcies across the retail industry are likely to have dampened base rent growth and thereby affecting the company’s revenues in the near term. In fact, the Zacks Consensus Estimate for third-quarter revenues is pegged at $260.7 million, suggesting a year-over-year decline of 7.7%.

Additionally, the Zacks Consensus Estimate for FFO per share witnessed a marginal downward revision to 75 cents over the past week, indicating bearish sentiments of analysts. It also indicates a 24.2% year-over-year decline.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a beat in terms of FFO per share for Regency this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Regency currently carries a Zacks Rank #4 (Sell) and has an Earnings ESP of +0.32%.

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:

Lexington Realty Trust (LXP - Free Report) , set to report third-quarter 2020 numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

National Storage Affiliates Trust (NSA - Free Report) , slated to release third-quarter 2020 earnings on Nov 5, has an Earnings ESP of +1.94% and a Zacks Rank of 3 at present.

Ventas, Inc. (VTR - Free Report) , slated to release third-quarter 2020 earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

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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