Retail real estate investment trust (“REIT”), General Growth Properties, Inc. is slated to report fourth-quarter 2016 results on Jan 30, after the market closes.

Effective today, this retail REIT is changing its name officially to GGP Inc. The new branding reflects the company’s emphasis as a retail real estate company. However, ahead of its fourth-quarter earnings release, let us analyze GGP’s performance for the past quarters.

In the last quarter, though the company had reported an in-line result; its revenue figure was weaker than expected. However, for the trailing four quarters, GGP has surpassed estimates in two quarters and met in the other two, posting an average positive surprise of 4.17%. This is depicted in the chart below.

General Growth Properties, Inc. Price and EPS Surprise
 

General Growth Properties, Inc. Price and EPS Surprise | General Growth Properties, Inc. Quote

Will GGP be able to overcome challenges this time and post a surprise? Or will a challenging backdrop in the retail real estate market hurt its financials this season? Let’s see how things have shaped up for this announcement.

Factors to Consider

GGP has a solid portfolio of high-quality retail properties across attractive locations in the U.S. Therefore, amid an improving economy, these retail properties have the capability to generate decent cash flows, given its cluster of renowned tenants.

However, of late, the U.S. retail real estate market has been plagued with issues like downsizing and bankruptcies of retailers. This is because mall traffic continues to suffer amid rapid shift in customers’ shopping preferences and patterns, with online purchases growing by leaps and bounds. These have made the retailers reconsider their footprint, and eventually opt for store closures in recent times. This has emerged as a pressing concern for retail REITs, as the trend is curtailing demand for the retail real estate space considerably.

Amid this, GGP has been striving to counter such pressure through various initiatives, including acquisition of troubled retailers, like Aéropostale, in a joint venture with Simon Property Group (SPG Quick QuoteSPG - Free Report) and Authentic Brands Group LLC. In addition, it is making concerted efforts to support omni-channel retailing.

However, we believe that implementation of such measures requires considerable upfront expenditure, which might limit near-term growth in profit margins. In fact, revenue growth in recent quarters remained restricted, failing to surpass estimates. This pressure on the top line is anticipated to sustain in the to-be-reported quarter as well.

Finally, the company expects same-store net operating income (NOI) growth of around 4% and funds from operations (“FFO”) per share in the range of 42–44 cents, for the fourth quarter. The Zacks Consensus Estimate for fourth-quarter FFO per share is currently pegged at 43 cents. However, GGP’s activities during the quarter could not gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that GGP will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of 42 cents and the Zacks Consensus Estimate of 43 cents, is -2.33%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: GGP currently has a Zacks Rank #3.

Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes our surprise prediction difficult.

We caution against stocks with Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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 they have the right combination of elements to report a positive surprise this quarter:

Ashford Hospitality Prime, Inc. , slated to release earnings results on Feb 22, has an Earnings ESP of +16.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston Properties Inc. (BXP Quick QuoteBXP - Free Report) has a Zacks Rank #3 and an Earnings ESP of + 0.67%. The company is scheduled to report results on Jan 31.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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