Can Retail REITs Q1 Earnings Surprise this Week? SPG, KIM, O

Monday marks the beginning of one of the busiest weeks this earnings season for the real estate investment trust (REIT) industry. Earlier in the week, top notch retail REITs like Simon Property Group Inc. SPG, Kimco Realty Corporation KIM and Realty Income Corp. O are slated to come up with their earnings releases.

In Q1, while industrial REIT Prologis Inc. PLD and office REIT SL Green Realty Corp. SLG reported positive surprises thanks to the steady performance of their portfolio, the performance of retail REITs may vary widely from their performance as retail REITs cater to the real estate needs of an entirely different asset class. So delving into the fundamentals of the retail real estate market becomes necessary.

According to a recent study by the commercial real estate services’ firm CBRE Group Inc. CBG, in the U.S. demand for retail space showed improvement in Q1. In fact, the study revealed continued recovery in the U.S. neighborhood, community and strip retail centers in the quarter with a 10 bps sequential decline in the average availability rate to 11.2%. Though lackluster retails sales in the first quarter are reasons to worry about, the absence of ample supply helped the retail market to address the slump.

Now let’s take a look at what’s in store for these S&P 500 retail REITs this quarter.

Simon Property is scheduled to report first-quarter 2016 results on Tuesday, Apr 26, before the market opens. The company has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold).

Simon Property enjoys a top notch position and a diverse portfolio of retail assets in the U.S.  A recent spate in transaction activities and the existing redevelopment pipeline are likely to aid the company’s top-line growth. While demand for quality retail space has risen, supply remains low.  This, in turn, is expected to drive occupancy and rent for Simon Property in the to-be-reported quarter.

But Simon Property faces rivalry from alternative types of retail such as catalogs and e-Commerce websites. Stiff competition, thus, remains a matter of concern for the REIT. (Read more: Simon Property's Q1 Earnings Peek: What's in the Cards?)

 

Kimco Realty is slated to report first-quarter 2016 results on Wednesday, Apr 27, after the market closes. The company has an Earnings ESP of 0.00% and a Zacks Rank #3.

Kimco remains well poised with premium properties in high-growth areas, presence of well-capitalized retailers in its tenant roaster, investments in high-quality neighborhood and community shopping centers and small shop portfolio expansion amid rising demand. In fact, in the first quarter, the company’s average base rent for the U.S. portfolio is expected to have seen continued improvement. Though lackluster first-quarter retail sales are reasons to worry about, the absence of ample supply is anticipated to have kept the demand/supply dynamics favorable in the real estate market. As such, leasing spreads are projected to increase.

However, Kimco’s focus on ownership of large, high-quality assets in major metro markets in the U.S., and simultaneous exit from its joint venture portfolio are resulting in huge dispositions. In fact, its first-quarter transaction activity reflects net selling and capital accumulation. While such efforts are encouraging for the long term, earnings-dilution led by high disposition activity cannot be bypassed. These might hurt the company’s growth momentum in the to-be-reported quarter. (Read more: Kimco Realty Q1 Earnings: What’s in Store for Stock?)

Realty Income is slated to report first-quarter 2016 results after the market closes on Tuesday, Apr 26. The company has an Earnings ESP of +0.00% and a Zacks Rank #2 (Buy).

For Realty Income, which targets well-located, freestanding, single-tenant, net-lease, commercial properties, same-store rent is expected to have grown in the first quarter, while store-level performance of its retail tenants is anticipated to have remained solid. Occupancy levels are expected to remain high after the company successfully concluded re-leasing of its properties in 2015 – the most active year in terms of lease expirations. Balance sheet is also expected to have remained solid with adequate liquidity and financial flexibility allowing the company to target opportunistic acquisitions.

But stiff competition and weak retail sales cannot be ignored. Therefore any robust growth is anticipated to elude the to-be-reported quarter. (Read more: What's in Store for Realty Income this Earnings Season?)

Nevertheless, we won’t be surprised if some of the companies deliver positive earnings surprises, as the estimates are too conservative. But irrespective of an earnings beat or miss, investors should focus on the companies’ fundamentals.

Do check back on our full write-up on earnings releases of these stocks.

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CBRE GROUP INC (CBG): Free Stock Analysis Report
 
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REALTY INCOME (O): Free Stock Analysis Report
 
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