As we are about to enter another eventful week of the current reporting cycle, real estate investment trust (REIT) will be seeing a really busy Monday.
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. However, underlying asset categories and location of properties play a crucial role in determining the performance of REITs.
Going by numbers, per a study by the commercial real estate services’ firm — CBRE Group Inc. (CBG - Free Report) — the overall U.S. office vacancy rate expanded 10 basis points (bps) to 13.0% during fourth-quarter 2017 amid an uptick in supply. Nevertheless, the national office vacancy rate still hovers near its post-recession low and vacancy continues to drop in majority of the U.S. office markets.
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.
Nevertheless, retail REITs have been avoiding heavy dependence on apparel and accessories, but expanding dining options, opening movie theaters and offering recreational facilities to boost traffic.
Therefore, surprises might be in store for some REITs, while others may disappoint this earnings season. However to predict that, we rely on the Zacks methodology, combining a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) or 2 (Buy) or at least 3 (Hold) — and a positive Earnings ESP, to predict the chances of a beat this quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Per our proprietary methodology, Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Research shows that with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70% for the stocks.
Let us take a look at how the following REITs are placed ahead of their quarterly releases.
Vornado Realty Trust (VNO - Free Report) has been actively repositioning its portfolio. In line with this, the company is involved in opportunistic acquisitions and divestitures, along with business spin-offs. In July 2017, it completed the spin-off of its Washington, DC business. This made Vornado a New York-based office and retail REIT. Though such efforts to streamline business are commendable, the dilutive effects of these moves cannot be ignored.
In January 2018, Vornado announced that its fourth-quarter 2017 financial results will include certain items that will have a negative impact of 18 cents on its funds from operations (FFO) per share. However, this amount will be excluded in the adjusted FFO per share figure.
We predict a fall in the company’s total revenues in the to-be-reported quarter. The Zacks Consensus Estimate for total revenues for the fourth quarter is currently pegged at $524.1 million. This reflects a decline of 17.9% from the prior-year quarter. The Zacks Consensus Estimate for FFO per share is currently pegged at 93 cents, which also denotes a projected decline of 17.7% year over year.
At present, Vornado has a Zacks Rank #4 (Sell) and an Earnings ESP of -4.76%. This combination of a negative ESP and a Zacks Rank of 4 lowers the chances of a positive surprise for the company. (Read more: Why an Earnings Beat Is Unlikely for Vornado in Q4)
Moreover, Vornado has a mixed surprise history. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and missed in the other two, witnessing an average negative surprise of 4.6%. This is depicted in the graph below:
National Retail Properties, Inc. (NNN - Free Report) invests in net-leased retail properties throughout the United States. The company is expected to report quarterly numbers around Feb 12.
The Zacks Consensus Estimate for FFO per share for National Retail Properties is projected to register 3.2% year-over-year growth in the fourth quarter to 64 cents. Also, the Zacks Consensus Estimate for revenues is pegged at nearly $148.8 million, which reflects growth of 5.7% year over year.
This Zacks Rank #3 stock has an Earnings ESP of -1.73%. Therefore, according to our quantitative model, it cannot be conclusively predicted whether National Retail Properties will be able to beat the Zacks Consensus Estimate in the quarter under review. In fact, though a favorable Zacks Rank increases the predictive power of Earnings ESP, we also need to have a positive ESP to be confident of an earnings beat.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock has exceeded estimates in three out of the preceding four quarters and met in the other, with an average beat of 2.87%, as demonstrated in the chart below:
Brixmor Property Group (BRX - Free Report) is engaged in ownership and operation of high-quality, open-air shopping centers. The company’s assets have a varied mix of highly productive non-discretionary and value-oriented retailers, as well as consumer-oriented service providers.
The company’s FFO per share for the quarter is expected to drop 5.7% year over year to 50 cents. Moreover, the Zacks Consensus Estimate for revenues is pegged at nearly $315.2 million, which reflects a decline of 2.7% from the prior-year period.
Currently, Brixmor Property Group has an Earnings ESP of +0.33% and a Zacks Rank #4. So, we can’t conclusively predict a likely earnings beat.
However, Brixmor Property Group witnessed positive surprises in three out of the trailing four quarters, and met in the other, resulting in an average positive surprise of 2.44%. This is depicted in the graph below.
Brixmor Property Group Inc. Price and EPS Surprise
Lodging REIT Sunstone Hotel Investors, Inc. (SHO - Free Report) has a portfolio of hotels which are mainly in the urban and resort upper upscale segment and usually operated under reputed brands.
The Zacks Consensus Estimate for revenues for the fourth quarter is currently pegged at $283.3 million. This reflects a decline of 2.2% as compared with the prior-year period. Moreover, the Zacks Consensus Estimate for FFO per share for the quarter is pegged at 26 cents, which indicates a projected decline of 10.3% year over year.
At present, Sunstone Hotel Investors has an Earnings ESP of +1.74%. Though this is leading and meaningful indicator of a positive surprise, its Zacks Rank #4 lowers the chances of a beat in the to-be-reported quarter.
Nevertheless, the stock has exceeded estimates in each of the trailing four quarters with an average beat of 9.4%. This is depicted in the graph below.
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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