As we stand in one of the busiest weeks of the current reporting cycle, investors can be lured by profits of companies that have already released their quarterly figures. But rather than adding the stock later to your portfolio, accumulating the ones that are yet to report and poised to beat estimates, can generate higher gains. This is because an earnings beat usually serves as a catalyst, raising investors’ confidence in a stock and resulting in price appreciation.
And REITs are now back in limelight as after a soft performance in 2018, the sector emerged as a solid winner this January, with the FTSE Nareit ALL REITs Index gaining 11.42%, outperforming the S&P 500’s rally of 8.01%.
Obviously, the pause mode adopted by the Federal Reserve toward rate hike has garnered enthusiasm for this sector as REITs are a preferred choice among investors owing to their high-dividend paying nature. Moreover, an unchanged decision with respect to rate comes as a relief because REITs usually have a high dependence on debt.
Further, prospects of a number of underlying asset categories of REITs are getting a boost amid healthy economy, job-market gains and high consumer confidence that are translating into greater demand for real estate and resulting in higher occupancy levels.
Take for example the industrial real estate category which is exhibiting solid strength amid e-commerce boom and supply-chain strategy transformations. In fact, per a study by the commercial real estate services firm — CBRE Group CBRE — availability fell for 34 straight quarters to 7.0% for the U.S. industrial market in Q4, denoting the lowest point since 2000. Additionally, with demand surpassing new supply, net asking rents increased 2.2% in Q4 to $7.37 per square feet — marking the highest level since 1989, per a CBRE report.
In the office sector too, the fourth-quarter vacancy rate declined to its lowest level in 11 years, shrinking 10 basis points (bps) to 12.6%, according to a study by CBRE Group. Further, job growth boosted annual net absorption to 58.3 million square feet of space — the highest since 2015.
In addition, the recent data from Reis shows that the neighborhood and community shopping center vacancy rate remained flat in the Dec-end quarter at 10.2%, but inched up from 10% witnessed 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, the company’s vacancy was 8.3%. Despite the store-closure issue plaguing the market, the little stability indicates slowdown in new development.
Furthermore, an improved economy, job-market gains and upbeat consumer confidence are signaling brighter prospects for hotel REITs. In fact, hotel demand registered 2.5% growth nationally in Q4 against the 1.6% rate in the prior quarter, while supply growth remained at 2.0%, per a report from CBRE. This solid demand growth has boosted national occupancy which went up 0.4% year over year as against the prior quarter’s decline. Average Daily Rate (ADR) moved up 2.0% nationally in Q4, while RevPAR was up 2.4% year over year.
Finally, data-center REITs too are experiencing a boom, with growing popularity of cloud computing, Internet of Things and big data, as well as the use of third-party IT infrastructure by several companies. Demand has been outpacing supply in top-tier data-center markets. These markets are absorbing new construction at an accelerated pace despite enjoying high occupancy.
However, despite the above-mentioned growth drivers, choosing the right stock could be difficult unless one knows the proper method. To make the task simple we rely on the Zacks methodology, combining a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here are four REITs that have the right combination of elements to deliver a positive surprise this season:
Hersha Hospitality Trust HT sports a Zacks Rank of 1 and has an Earnings ESP of +1.21%. The Zacks Consensus Estimate for Q4 funds from operations (FFO) per share is pegged at 58 cents, which denotes expected year-over-year growth of 20.8%. The company has been a steady performer, having exceeded the Zacks Consensus Estimate in each of the trailing four quarters, with the most recent positive surprise being nearly 4.6%. Moreover, the stock has a dividend yield of 6.08%.
Philadelphia, PA-based Hersha Hospitality Trust is into ownership of high-quality upscale, luxury and lifestyle hotels in urban gateway markets and coastal destinations.
Hersha Hospitality is slated to report quarterly results on Feb 25.
CyrusOne Inc. CONE has a Zacks Rank of 3 and an Earnings ESP of +3.07%. The Zacks Consensus Estimate for Q4 FFO per share is pegged at 82 cents. The company delivered positive surprises in three of the trailing four quarters, with average beat of 4.58%. Further, the stock has a dividend yield of 3.40%.
Dallas, TX-based CyrusOne is a data-center REIT engaged in providing highly reliable enterprise-class, carrier-neutral data center properties. The company offers mission-critical data center facilities that protect and ensure continued operation of IT infrastructure for several customers, including Fortune 1000 companies.
CyrusOne is scheduled to release earnings on Feb 20.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Federal Realty Investment Trust FRT has a Zacks Rank #3 and an Earnings ESP of +1.53%. The Zacks Consensus Estimate for the to-be-reported quarter FFO per share is pegged at $1.57, denoting a year-over-year projected increase of roughly 6.8%. Moreover, the stock has a dividend yield of 3.09%.
Rockville, MD-based Federal Realty Investment Trust is engaged in the ownership, operation and redevelopment of high-quality retail based properties positioned mainly in major coastal markets from Washington, D.C. to Boston, as well as San Francisco and Los Angeles.
Federal Realty is set to report its quarterly numbers on Feb 13.
STAG Industrial, Inc. STAG carries a Zacks Rank #3 and has an Earnings ESP of +0.84%. The Zacks Consensus Estimate for the fourth-quarter FFO per share is pegged at 45 cents. The company posted average positive surprise of 1.15% over the trailing four quarters. It has a long-term growth rate of 5% and a dividend yield of 5.21%.
Boston, MA-based STAG Industrial is engaged in the acquisition and operation of single-tenant, industrial properties throughout the United States.
STAG Industrial is slated to report results on Feb 13.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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