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GGP vs. ESS: Which Stock is Poised for Better Q4 Earnings?

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We have crossed the halfway mark in the Q4 reporting season for the S&P 500 index, with results from 251 members already out. Per the latest Earnings Preview, total earnings for these 251 S&P 500 constituents are up 16% from the year-ago quarter on a 10.5% rise in revenues, with 80.5% beating EPS estimates and 78.1% exceeding top-line expectations.

Retail REIT GGP Inc. and residential REIT Essex Property Trust, Inc. (ESS - Free Report) are yet to report their numbers this earnings season. Let’s take a look at which of these REIT has an edge over the other ahead of their Q4 release on Feb 7.

However, before delving deeper into figures, let's first discuss the overall scenario for the REIT industry and then the particular asset categories to which these two companies belong to.

A Glance at the Industry

Admittedly, the December rate hike and possibilities of further increases in rates this year have kept investors in the REIT space worried to some extent. This is because the use of leverage for the REIT business makes the returns from this industry susceptible to interest-rate movements. Particularly, a rise in the interest rate affects the present value of future cash flows. Therefore, asset valuation, including bond coupons and stock dividends, experiences a decline.

However, apart from the rate factor, underlying asset class dynamics play a vital role in determining the operating performance of REITs. And per a study by the real estate technology and analytics firm — RealPage, Inc. — the U.S. apartment market reported moderate rent growth for the calendar year 2017 and seasonal pricing cuts in the fourth quarter. While U.S. apartment rents increased at a modest rate of 2.5% in 2017, effective rents for new leases edged down 0.9% during the quarter. Admittedly, the levels of rent growth have moderated from the earlier years. However, national apartment occupancy came in at 95.1% at the end of fourth-quarter 2017, remaining stable year over year.

Also, the holiday season turned out to be blissful for the retailers with upbeat consumer sentiment amid an improving economy, rising income and low unemployment level. Per government data, consumer spending remained solid during this season, with retail sales rising 0.9% and 0.4% in November and December, respectively.

However, the retail real estate market continued to bear the brunt as mall traffic suffered amid a rapid shift in customers’ shopping preference through online channels, resulting in an increasing number of retailers joining the dot-com bandwagon. These have made retailers reconsider their footprint and eventually opt for store closures in recent years, while others unable to cope with competition are filing bankruptcies. Additionally, the turbulent retail real estate market is said to have led to tenants demanding substantial lease concessions, which mall landlords find unjustified.

Zacks Methodology

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in the upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%.  

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Price Performance

During the fourth quarter of 2017, GGP Inc. outpaced Essex Property in terms of price performance. GGP Inc. rallied 12.6% compared with Essex Property’s depreciation of 5%. Notably, the month of November witnessed increased shareholder activity in the retail real estate market, triggered by Brookfield Property Partners’ takeover offer for GGP Inc.

GGP 4Q Factors at Play

Chicago, IL-based GGP Inc. has a solid portfolio of high-quality retail properties across attractive locations in the United States. Therefore, amid an improving economy, these retail properties have the capability to generate decent cash flows, given its cluster of renowned tenants. Nevertheless, the choppy retail real estate market with rising online sales, store closures and retailers’ bankruptcies is likely to have restrained demand for space considerably.

GGP Inc. has been making efforts to counter such pressure through various initiatives. The company is focusing on omni-channel retailing to generate higher sales. Further, it is focusing on offering mall visitors with access to retail, dining and entertainment hubs in some of the best trade areas in the nation. Such strategic moves boost the shopping experience and enhance sales volume at tenant stores, consequently raising demand for the company’s assets. However, implementation of such measures requires significant upfront costs, which might impede near-term growth in profit margins.

Amid these, the Zacks Consensus Estimate for revenues for the to-be-reported quarter is pegged at $651.7 million, reflecting projected growth of 6.8% from the year-ago period. For fourth-quarter 2017, the company projects funds from operations (FFO) per share in the range of 46-48 cents. The Zacks Consensus Estimate for the same is currently pegged at 47 cents, indicating projected growth of 9.3% year over year.

Yet, over the trailing four quarters, the company surpassed estimates in one occasion and met in the other three, the average positive surprise being 3.6%. This is depicted in the graph below.

GGP Inc. has an Earnings ESP of -0.46%. In addition, it has a Zacks Rank #4 (Sell), which also reduces the predictive power of ESP. (Read more: Can GGP Counter Impact of Online Retail Boom in Q4 Earnings?)

Essex Property 4Q Factors to Consider

San Mateo, CA-based Essex Property has a strong property base and a sturdy balance sheet. The company’s substantial exposure to the West Coast market, which is home to several innovation and technology companies, is likely to offer scope to boost its top line in the quarter to be reported. Also, there is significant pent-up demand.

Nonetheless, apartment deliveries remained elevated in the reported quarter. This uptick in supply is a concern because it curbs landlords’ ability to command more rent and results in lesser absorption. As such, in the fourth quarter, occupancy is likely to remain nearly unchanged. Furthermore, escalating supply in certain submarkets is expected to result in aggressive rental concessions and moderate pricing power of landlords.

Amid these, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $346.1 million, marking an expected increase of 5.2% year over year. Additionally, for the fourth quarter, the company estimates core FFO per share in the $2.95-$3.05 band. The Zacks Consensus Estimate for the same is currently pegged at $3.01, indicating 7.1% growth year over year.

The company beat the Zacks Consensus Estimate in three occasions — the average beat being 0.94%, in the preceding four quarters. This is depicted in the graph below:

Essex Property has an Earnings ESP of -0.21% and a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes surprise prediction difficult. (Read more: Essex Property to Post Q4 Earnings: What's in Store?)

Our Take

Therefore, per our proprietary model, we cannot conclusively predict positive surprise in terms of FFO per share for GGP Inc. and Essex Property in the fourth quarter. Investors should rather focus on the fundamentals of these companies to take any decision.
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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