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Can Essential Tenancy Shape Regency's (REG) Q2 Earnings?

Regency Centers Corp. REG is slated to report second-quarter 2020 earnings on Aug 3, after market close. The company’s funds from operations (FFO) per share and revenues are anticipated to have declined year over year.

In the last reported quarter, this Jacksonville, FL-based retail real estate investment trust (REIT) posted in-line results in terms of FFO per share. Decent leasing activity and rent spreads aided performance.

Further, the company has a decent surprise history. It beat the Zacks Consensus Estimate in two of the trailing four quarters, missed in one and met in the other, the average surprise being 1.03%. This is depicted in the graph below:

Regency Centers Corporation Price and EPS Surprise

 

Regency Centers Corporation Price and EPS Surprise

Regency Centers Corporation price-eps-surprise | Regency Centers Corporation Quote

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

Factors at Play

As the pandemic eased its grip in the second quarter, stay-at-home orders were lifted in several states, leading to a rebound in economic activity and reopening across the retail real estate.

Regency Centers too witnessed the reopening of stores at its properties. Specifically, as of May end, around 75% of its tenants (based on pro-rate annual base rent or ABR) were open, increasing from around 60% in April.

Undoubtedly, significant essential retail tenancies at the company’s centers have enabled its properties to remain open, operating for the entirety of the pandemic. This has also supported rent collections for the second quarter.

In fact, essential retail and services tenants — constituting 43% of Regency’s portfolio — paid 95% and 92% of April and May base rents, respectively, as of May 31, 2020.

However, leasing velocity is expected to have slowed in the second quarter, owing to the pandemic-led decline in demand. Further, the pandemic has been most impactful for many non-essential businesses that are experiencing significant declines in customer traffic and temporarily store closures. This has adversely impacted the tenants’ ability to pay rent obligations. As a result, the company is likely to have witnessed a rise in the number of tenants making late or partial rent payments, requesting rent deferrals, or defaulted on rent payments.

As of May 31, 2020, pro-rata base rent collections for April were 68%, while May rent collections stood at only 58%. High amounts of overdue rents are expected to have hindered the company’s top-line growth in the June-end quarter. In fact, the Zacks Consensus Estimate for second-quarter revenues is pegged at $249.3 million, indicating a year-over-year decline of 7.1%.

Moreover, store closures and bankruptcies have been affecting the retail real estate market, driven by lower mall traffic and faster adoption of online shopping. The pandemic amplified these challenges faced by the retail real sector, making any turnaround difficult in the June-end quarter.

Regency, too, is not protected from move-outs, store closures and retailer bankruptcies. This is anticipated to have curbed its growth momentum in the to-be-reported quarter.

Additionally, the Zacks Consensus Estimate for FFO per share witnessed a 4.9% downward revision to 78 cents over the past week, indicating bearish sentiments of analysts. It also indicates a 17.9% year-over-year decline.

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 #3 and has an Earnings ESP of -3.22%.

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:

Digital Realty Trust DLR, slated to release second-quarter earnings on Jul 30, has an Earnings ESP of +2.70% and a Zacks Rank of 3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, set to report quarterly numbers on Aug 6, presently has an Earnings ESP of +0.44% and 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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