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Can Federal Realty (FRT) Pull Off a Surprise in Q4 Earnings?

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Federal Realty Investment Trust (FRT - Free Report) is set to report fourth-quarter 2018 results after the market closes on Feb 13. Both its revenues and funds from operations (FFO) are anticipated to reflect year-over-year growth.

In the last reported quarter, this retail real estate investment trust (REIT) delivered a positive surprise of 1.94% with respect to FFO per share. Results reflected growth in revenues.

The company has a decent surprise history. In the trailing four quarters, it surpassed estimates thrice and came in line in the other, with average positive surprise of 1.15%. The graph below depicts the surprise history of the company:

 

For full-year 2018, Federal Realty expects FFO per share of $6.18-$6.24. The Zacks Consensus Estimate for the same is currently pinned at $6.22.

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

Factors at Play

Federal Realty’s portfolio of premium retail assets — mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles — along with a diverse tenant base positions it well for decent growth in the to-be-reported quarter.

Moreover, a healthy U.S. economy, job-market gains, high consumer confidence and low gas prices have buoyed consumers’ spending power. This is evident from the 5.1% year-over-year growth in the retail sales figure for the 2018 holiday season, which marked the highest level in six years, according to Mastercard’s SpendingPulse. This is anticipated to send across encouraging signals within the retail real estate industry.

And with Federal Realty’s properties having superior demographics with dense population and strong household income, as well as flexible property format, the company is likely to have enjoyed decent footfall.

In addition, the recent data from Reis shows that the neighborhood and community shopping center vacancy rate remained flat in the fourth quarter at 10.2%, but marginally inched up from 10% at year-end 2017. Mall vacancy rate slightly edged down to 9% in the quarter from 9.1% in the third quarter. At year-end 2017, mall vacancy was 8.3%. Despite the store-closure issue plaguing the market, the little stability indicates slowdown in new development.

In fact, amid fast-evolving retail environment with store closures and bankruptcies rampant, Federal Realty is undertaking concerted measures to reposition, redevelop and re-merchandise its portfolio. The company is also focused on mixed-use properties, aiming to lure those customers who prefer to work, live and stay in the same area.  Backed by such efforts, the company is expected to have experienced healthy rate and occupancy in the quarter under review. Also, Federal Realty has a decent balance-sheet position, with ample liquidity and this is expected to have continued into the fourth quarter as well.

Amid these, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $234.2 million, indicating an improvement of 4.6% from the prior-year quarter. Total rental income is projected to be $232 million, up 5% year over year.

Additionally, Federal Realty’s activities during the quarter secured adequate analyst confidence. Consequently, the consensus estimate for fourth-quarter FFO per share moved up marginally to $1.57 in a month’s time. This also indicates a year-over-year rise of 6.8%.

Here is what our quantitative model predicts:

Federal Realty has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: The Earnings ESP for Federal Realty is +1.53%.

Zacks Rank: Federal Realty carries a Zacks Rank #3, currently.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

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:

Hersha Hospitality Trust (HT - Free Report) , scheduled to release earnings on Feb 25, has an Earnings ESP of +3.81% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sabra Health Care REIT, Inc. (SBRA - Free Report) , slated to release fourth-quarter results on Feb 24, has an Earnings ESP of +5.49% and a Zacks Rank of 3.

American Tower Corporation (AMT - Free Report) , set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

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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