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Here's How Regency (REG) is Placed Ahead of Q4 Earnings

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Regency Centers Corp. (REG - Free Report) is slated to report fourth-quarter and full-year 2020 results on Feb 11, after the bell. The company’s quarterly results will likely display declines in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this Jacksonville, FL-based retail real estate investment trust (REIT) posted NAREIT FFO per share of 60 cents, missing the Zacks Consensus Estimate of 75 cents. Results reflected a decline in same-property NOI due to a higher rate of uncollectible lease income in relation to the coronavirus pandemic.

In the last four quarters, the company exceeded the Zacks Consensus Estimate on one occasion, met in another and missed in the other two. It has a trailing four-quarter negative surprise of 6.94%, on average. This is depicted in the graph below:

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

Factors to Note

The retail real estate market had already been battling dwindling traffic issues, store closures and retailer bankruptcies, and the pandemic has only further aggravated its woes. However, per a report from CBRE Group (CBRE - Free Report) , solid holiday spending helped total retail sales in the fourth quarter which remained above the first-quarter pre-pandemic level. In fact, the immunization process roll-out and the additional fiscal stimulus have boosted consumer sentiment.

Retail sales grew 3.9% year on year in the fourth quarter to $1.64 trillion. Though non-store retailers have been witnessing decent sales activity, this holiday season saw higher-than-expected physical store shopping, which is encouraging for the retail real estate market.

The total retail availability rate remained sequentially unchanged at 6.6% in the fourth quarter but expanded 40 basis points year on year thanks to the pandemic. Particularly, the power center segment reported the largest increase year on year. Moreover, rates have varied widely in terms of geography, with the suburban areas and tier II cities outperforming higher density urban areas.

Net absorption of 7.1 million square feet in the fourth-quarter marked the first quarterly gain since the outbreak of the global health crisis in the January-March quarter of 2020. Except power centers, every property type recorded positive net absorption. Amid significant e-commerce penetration and store closures, power centers have been affected as well. However, total retail completions plummeted nearly 60% year on year during the fourth quarter due to the COVID-associated restrictions.

Further, fitness centers and movie theaters continue bearing the brunt of the pandemic-induced social-distancing measure. While experience-based retail tenants continued to impact retail REITs, Regency’s essential tenancy-oriented centers are likely to have sailed through these testing times.

Moreover, during the fourth quarter, Regency sold five shopping centers for a total of $77.8 million at the company’s share. Also, following a detailed review of its extensive future pipeline of value-add development and redevelopment projects, and management’s decision of not pursuing certain projects or components of projects, the REIT estimated a write-off of certain prior capitalized pre-development costs in a range of $7-$9 million for the December-end quarter. This included the anticipated write-off of $5.3 million at the Serramonte Center because of revised scope.

Notably, as of Oct 31, 2020, essential retail and services tenants comprised 45% of Regency’s annual base rent (ABR).This has enabled its properties to remain open, operating for the entirety of the pandemic. Roughly 97% of Regency Centers’ tenants were open, based on pro-rata annual base rent (ABR) as of the end of October. In addition, through Oct 31, 2020, the company collected 86% of third-quarter pro-rata ABR and 87% of October pro-rata ABR.

Nonetheless, leasing velocity might have stayed at depressed levels during the fourth quarter, due to the pandemic-induced demand drop. The market is witnessing a shift in retail shopping from the brick-and-mortar stores to Internet sales. Recent efforts of online retailers to go deeper into the grocery business pose a concern for this REIT that is focused on building a premium portfolio of grocery-anchored shopping centers.

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 uncollectable lease income issues in the fourth quarter.

Also, a high number of bankruptcies across the retail industry might have dampened base rent growth and thereby, eroding the company’s revenues.

The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $263.86 million, suggesting a year-over-year decline of 6.1%.

Additionally, the Zacks Consensus Estimate for FFO per share witnessed a 3-cent downward revision to 72 cents over the past week, indicating bearish sentiments of analysts. It also calls for a 28% year-over-year decline.

For the full year, the Zacks Consensus Estimate for FFO per share has been revised marginally downward to $2.91 over the past week. The figure also indicates a 25.2% decline year on year. Revenues are projected to decline nearly 5% year on year to $1.06 billion.

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 -1.39%.

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:

Rexford Industrial Realty, Inc. (REXR - Free Report) , slated to release fourth-quarter earnings on Feb 10, has an Earnings ESP of +2.13% and carries a Zacks Rank of 3, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Healthpeak Properties, Inc. (PEAK - Free Report) , scheduled to report earnings figures on Feb 9, has an Earnings ESP of +5.66% and holds a Zacks Rank of 3 at present.

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.

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