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4 Residential REITs Buoying Investors' Optimism in Q2 Earnings

Moumita C. Chattopadhyay

The possibility of a rate cut at this month’s FOMC meeting aggravated recently as the Fed chairman Jerome Powell, in a prepared testimony to the House Financial Services Committee, emphasized that the central bank is prepared to "act as appropriate" in order to sustain economic expansion that is challenged by a slowdown in global growth and trade disputes while inflation fails to reach target levels.

This need for adoption of a dovish stance helped the bourses in the United States scale new heights — the Dow Jones Industrial Average surpassed 27,000 levels for the first time in its history, while the S&P 500 breached its new milestone of 3,000.

Need for REIT Stocks Addition

Obviously, the latest turnout of events has put the real estate investment trusts (REITs) back in the limelight as a soft-rate environment helps this rate-sensitive industry gain. This is owing to the companies’ dependence on debt for their business. Also, REITs are considered as bond substitutes for their high-dividend paying nature. However, parking your hard earned money can be far more rewarding when along with the rate cut, the fundamentals of the underlying real estate asset category of REITs display strength.

Why Residential REITs are Prudent Choice Now?

This is where the residential REITs excel as the latest figures from real estate technology and analytics firm RealPage, Inc. RP suggest that during the current year’s prime leasing period, the U.S. apartment rental market was able to bank on the stellar demand for rental units. The apartment rental market’s fundamentals have been buoyed by a stable economy, a healthy job market, household formation and high home-ownership costs in several markets hindering transition from renter to homeowner.

Leasing activity accelerated as demand was strong during the second quarter and per the RealPage report, from April through June, net move-ins aggregated 155,515 units, which came in 11% higher than the second-quarter 2018 product absorption as well as touched a five-year high.

With an impressive leasing activity, occupancy reached 95.8% during the June-end quarter, up from the prior-year quarter’s 95.4%. This upswing in occupancy level amidst a steady delivery of new units looks encouraging. With occupancy pushing up, rent growth also seems to be steady. In fact, the market has achieved a 3% increase in rents from the prior-year level, attaining an average of $1,390 per month.

Moreover, the Zacks REIT And Equity Trust - Residential industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #47, which places it at the top 18% of 256 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Winning Stocks

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.

Therefore, rather than accumulating the stocks later, investing in the ones that are yet to report and poised for a beat, can generate higher gains. Because an earnings beat usually serves as a catalyst, raising investors’ confidence in a stock and resulting in price appreciation.

Here are four residential REITs that have the right combination of elements to deliver a positive surprise this season:

Essex Property Trust ESS currently carries a Zacks Rank of 2 and has an Earnings ESP of +0.42%. The Zacks Consensus Estimate for second-quarter funds from operations (FFO) per share is pegged at $3.26, denoting expected year-over-year growth of around 3.8%. The company has been a decent performer, having exceeded the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 0.72%. The Zacks Consensus Estimate for second-quarter revenues of $358.2 million indicates a 2.7% uptick year over year. The stock has an expected long-term growth rate of 5.7%.

Headquartered at San Mateo, CA, Essex Property Trust is engaged in the acquisition, development, redevelopment and management of multi-family residential properties. Specifically, the company enjoys concentration of assets in select markets along the West Coast, which is home to several innovation and technology companies and the region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends. The company has a dividend yield of 2.57%.

Essex Property Trust is slated to report quarterly results on Jul 24.

Equity Residential EQR carries a Zacks Rank #2, at present, and has an Earnings ESP of +2.35%. The Zacks Consensus Estimate for the to-be-reported quarter’s FFO per share is pinned at 85 cents — marking projected year-over-year growth of 4.9%. The company posted average positive surprise of 0.33%, over the last four quarters. The June-end quarter revenues are estimated to be up 4.3% year over year to $667.5 million. The company has an anticipated long-term growth rate of 5.9%. It has a dividend yield of 2.88%.

Chicago, IL-based residential REIT Equity Residential is focused on the acquisition, development and management of high-quality apartment properties in top U.S. growth markets.

Equity Residential is scheduled to release its earnings figures on Jul 30.

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

Mid-America Apartment Communities MAA, commonly known as MAA, currently carries a Zacks Rank #2 and has an Earnings ESP of +1.31%. In terms of FFO per share, the company delivered an average positive surprise of 2.52% over the preceding four quarters and the second-quarter estimate is currently pinned at $1.53. Quarterly revenues are expected to climb nearly 4% to $405.5 million. The company has a dividend yield of 3.18%.

Headquartered in Germantown, TN, MAA is engaged in owning, acquiring, operating and selective development of apartment communities, located primarily in the Southeast, Southwest and Mid-Atlantic regions of the United States.

MAA is set to release results on Jul 31.

Camden Property Trust CPT, another Zacks #2 Ranked stock, has an Earnings ESP of +0.14%. The Zacks Consensus Estimate for the quarter under review’s FFO per share has been revised marginally upward to $1.27. The figure indicates a year-over-year estimated increase of more than 6.7%. Moreover, the Zacks Consensus Estimate for quarterly revenues of $252.4 million indicates year-over-year growth of nearly 6.5%. The company has been a decent performer, having exceeded the Zacks Consensus Estimate in three of the last four quarters, the average beat being 0.63%. The stock has a projected long-term growth rate of 6.6%. The company has a dividend yield of 2.94%.

Camden Property Trust, based in Houston, TX, is engaged in the ownership, management, development, redevelopment, acquisition, and construction of multi-family apartment communities.

Camden Property Trust is also slated to report its quarterly numbers on Jul 25.

Here’s how the above stocks have performed so far in the year:

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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