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What's in Store for City Office REIT's (CIO) Q3 Earnings?

Zacks Equity Research

City Office REIT, Inc. CIO is slated to report third-quarter 2019 results before the market opens on Nov 1. The company’s revenues and funds from operations (FFO) per share are expected to display year-over-year (y/y) growth.

In the last reported quarter, this real estate investment trust (REIT), which owns and operates office properties in metropolitan areas of Southern and Western United States, reported core FFO per share of 34 cents, surpassing the Zacks Consensus Estimate of 29 cents. Results reflected y/y increase in same-store cash net operating income (NOI) as well as rental and other revenues.

The company delivered an average positive surprise of 5.41%, in the last four quarters, surpassing estimates twice, missing on one occasion and meeting in the other. The graph below depicts this surprise history:

City Office REIT, Inc. Price and EPS Surprise
 

City Office REIT, Inc. Price and EPS Surprise


City Office REIT, Inc. price-eps-surprise | City Office REIT, Inc. Quote

Let’s see how things are shaping up for this announcement.

The U.S. office market continued to witness methodical growth in the third quarter. This comes at a time when the U.S economy is now at its record-long, economic expansion cycle. In fact, employment growth remained sturdy, with the July-September quarter adding 157,000 new jobs on an average. This is likely to have supported healthy leasing activity and rental rate growth.

In fact, report from Newmark Knight Frank suggests that the U.S. office market tightened during third-quarter 2019. In fact, vacancy rates shrunk 40 basis points year over year, although 8.9 million square feet of new office space was delivered during this period.

In addition, job growth in office-using sectors facilitated 2.6% y/y improvement in asking rents. However, absorption in the September-end quarter totaled 7.5 million square feet of space, declining from 13.9 million square feet of space in the prior-year quarter.

Additionally, City Office’s markets also witnessed significant growth. Per a report, Dallas witnessed the highest y/y growth of 5.4% in office using jobs. Further, Phoenix recorded maximum positive rent absorption of 1.43 million square feet of space during the reported quarter.   

These favorable conditions in the overall office real estate sector as well as in the company’s high-growth markets are anticipated to have spurred tenant demand at its properties.

In addition, the company has been continuously undertaking renovation programs to include modern amenities and enhance the quality of its properties. These capital improvements have likely resulted in occupancy gains and higher rents at its properties. This is anticipated to have boosted the company's same-store NOI and revenue growth in the July-September quarter.

In fact, the Zacks Consensus Estimate for the quarter’s revenues is pegged at $39.6 million and indicates 18.1% y/y growth.

Also, prior to the third-quarter earnings release, the company has been witnessing upward estimate revision. As such, the Zacks Consensus Estimate of FFO per share for the quarter has been revised 3.3% upward to 31 cents over the past month, reflecting analysts’ bullish sentiments. Moreover, it represents a y/y improvement of 10.7%.

Earnings Whispers

Our proven model doesn’t conclusively predict a positive surprise in terms of FFO per share for City Office this time around. A positive Earnings ESP is a meaningful and leading indicator of a likely FFO beat. This, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), makes us reasonably confident of a positive surprise.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: City Office’s Earnings ESP is +1.09%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Apartment Investment and Management Company AIV, set to release quarterly numbers on Oct 31, has an Earnings ESP of +0.6% and carries a Zacks Rank of 3, currently.

Senior Housing Properties Trust SNH, slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Medical Properties Trust, Inc. MPW, scheduled to release earnings results on Oct 31, has an Earnings ESP of +4.76% and carries a Zacks Rank of 2, at present.

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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