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4 Top REITs Buoying Investors' Optimism This Earnings Season

Moumita Chattopadhyay

With the Fed’s recent dovish stance, REITs are now back in limelight. Encouragingly, the occupancy levels of a number of asset types hovering near the record-high marks indicate strong demand and scope for generating steady revenues. Particularly, after a soft performance in 2018, the sector emerged as a solid winner in the first quarter, with total returns of the FTSE Nareit All REITs Index growing 16.7%, outperforming the S&P 500’s rally of 13.65%, per data from REIT.com.

Notably, the latest jump in the retail sales figure, job-market gains and still high consumer confidence indicate a pick-up in economic growth, which had been sluggish, of late. This is again translating into greater demand for real estate and resulting in higher occupancy levels for a number of asset categories.

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 — availability fell for 35 straight quarters to 7% for the U.S. industrial market in the first quarter, denoting the lowest point since 2000. Net asking rents increased 2.2% in the quarter to $7.51 per square feet — marking the highest level since 1989, per a CBRE report.

In addition, the recent study by the real estate technology and analytics firm — RealPage, Inc. — shows that the U.S. apartment market managed to retain the rent momentum which was achieved in the later part of 2018, although new supply volumes remained elevated in the Jan-Mar quarter. Apartment rents were up 3.2% on an annual basis as of the first quarter. In fact, for six straight months, annual rent growth exceeded the 3% mark. Moreover, occupancy came in at 95.2% in the quarter, expanding 10 basis points (bps) year on year.

Further, data-center REITs 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. E-commerce is also propelling demand for data-center REITs as it offers critical infrastructure for the e-retail value chain. Thus, demand has been outgrowing supply in top-tier data-center markets. These markets are absorbing new construction at an accelerated pace despite enjoying high occupancy.

Also, according to a report by the Newmark Knight Frank, the first-quarter office vacancy rate shrunk 30 bps, year over year, to 13%. Furthermore, job creation in office-using sectors triggered demand, resulting in 3.2% year-over-year growth in asking rents.

The Zacks Methodology

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 that are yet to report and poised for a beat, can generate higher gains. Because earnings beat usually serves as a catalyst, raising investors’ confidence in a stock and resulting in price appreciation.

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

Digital Realty Trust, Inc. DLR currently carries a Zacks Rank of 2 and has an Earnings ESP of +1.27%. The Zacks Consensus Estimate for first-quarter funds from operations (FFO) per share is pegged at $1.65, denoting expected year-over-year growth of around 2.5%. The company has been a steady performer, having exceeded the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 1.56%. The stock has an expected long-term growth rate of 7.1%.

San Francisco, CA-based data-center REIT Digital Realty supports the data-center, colocation and interconnection strategies of several firms across its secure, network-rich portfolio of data centers positioned in North America, Europe, Asia and Australia.

Digital Realty is slated to report quarterly results on Apr 25.

Duke Realty Corporation DRE carries a Zacks Rank #3, at present, and has an Earnings ESP of +3.94%. The Zacks Consensus Estimate for the to-be-reported quarter’s FFO per share is pinned at 32 cents — marking projected year-over-year growth of 3.23%. The company posted average positive surprise of 1.57%, over the last four quarters. It has an anticipated long-term growth rate of 4.8%.

Indianapolis, IN-based Duke Realty is engaged in the ownership and operation industrial assets in major U.S. metropolitan areas.

Duke Realty is scheduled to release its earnings figures on Apr 24.

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

AvalonBay Communities, Inc. AVB, another Zacks #3 Ranked stock, has an Earnings ESP of +0.15%. The Zacks Consensus Estimate for the quarter under review’s FFO per share has been revised marginally upward to $2.28. The figure indicates a year-over-year estimated increase of roughly 4.6%. The company has a projected long-term growth rate of 5.7%.

This residential REIT, based in Arlington, VA, is engaged in developing, redeveloping, acquiring and managing apartment communities in top metropolitan areas of the United States.

AvalonBay is also set to report its quarterly numbers on Apr 24.

Douglas Emmett, Inc. DEI carries a Zacks Rank #3 and has an Earnings ESP of +2.17%. The Zacks Consensus Estimate has seen a marginal upward revision and is now pegged at 52 cents, indicating anticipated growth of 6.12% year over year. The company delivered average beat of 0.5%, in the preceding four quarters.

Based Santa Monica, CA, Douglas Emmett is one of the leading owners and operators of high-quality office and multifamily properties in the premier coastal submarkets of Los Angeles and Honolulu.  

Douglas Emmett is slated to release results on May 2.

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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