U.S. Markets closed

4 Top REITs Buoying Investors' Optimism This Earnings Season

Moumita C. Chattopadhyay

Of late, the Fed chairman Jerome Powell and other officials of the regulatory body have been dropping hints about more aggressive policy easing. Earlier, Powell, in a prepared testimony to the House Financial Services Committee, had 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.

Later, the New York Federal Reserve president John Williams and Fed vice chair Richard Clarida also gestured a dovish tone. However, a New York Fed spokesperson later clarified that Williams was drawing from academic research and not hinting at potential policy actions at the upcoming FOMC meeting.

The latest turnout of events has, undoubtedly, put REITs back in the limelight as a soft-rate environment benefits the rate-sensitive industry. This is owing to the companies’ dependence on debt for their business. Additionally, REITs are considered as bond substitutes for their high-dividend paying nature.

Further, the fundamentals of a number of underlying asset categories of REITs displayed strength during the June-end period amid low unemployment level and rising wages, and still-resilient consumer sentiment. This again translated into elevated demand for real estate and resulted in higher occupancy levels.

One of the cases in point is residential REITs. 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 capitalize on stellar demand for rental units.

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. Occupancy reached 95.8% during the second quarter, up from the prior-year quarter’s 95.4% despite steady delivery of new units. Moreover, the market has achieved a 3% increase in rents from the prior-year level, attaining an average of $1,390 per month.

And if you assumed that retail REITs are falling behind due to store closures, then you should reconsider your decision. This is because though the retail real estate market is undergoing structural changes, the recent data from Reis indicates stability in the vacancy rate and rent levels. It also suggests that the sector has been able to weather such challenges to some extent.

In fact, the vacancy rate of neighborhood and community shopping center shrunk 10 basis points sequentially to 10.1% in the second quarter — denoting the first decline since first-quarter 2016. The Regional Mall vacancy rate remained flat at 9.3% in the second quarter. Also, both, national average asking rent and effective rent, which nets out landlord concessions, inched up 0.4% sequentially and 1.7% from the year-ago quarter.

Though store closures have been making headlines, retail REITs are making continued efforts with the transformation initiatives of their traditional retail hubs into entertainment destinations and lifestyle resorts. This apart, minimal construction activity in the pipeline has resulted in the stability in vacancy rate and rent levels.

The Zacks Methodology

However, picking 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 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:

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 on year.

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.

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

Equity Residential EQR carries a Zacks Rank #3, at present, and has an Earnings ESP of +1.30%. 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 came up with an average positive surprise of 0.33%, over the last four quarters. The April-June 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%.

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.

Federal Realty Investment Trust FRT currently carries a Zacks Rank of 2 and has an Earnings ESP of +0.57%. The Zacks Consensus Estimate for second-quarter FFO per share is pinned at $1.58 — calling for projected year-over-year growth of more than 1.9%. The company has been a steady performer, having outshined the Zacks Consensus Estimate in three of the preceding four quarters, the average beat being 0.98%. Quarterly revenues are estimated to be up nearly 4% year over year to $233.8 million. The stock has a projected long-term growth rate of 5.1%.

Rockville, MD-based retail REIT Federal Realty is engaged in the ownership, operation and redevelopment of high-quality retail based properties located primarily 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 Aug 1.

Kimco Realty Corporation KIM carries a Zacks Rank #3, at present, and has an Earnings ESP of +2.49%. The Zacks Consensus Estimate for the quarter under review’s FFO per share is pinned at 36 cents. Over the last four quarters, Kimco beat estimates on two occasions and posted in-line results in the other two, generating an average beat of 1.39%. It has an anticipated long-term growth rate of 4%.

New Hyde Park, NY-based retail REIT Kimco Realty is engaged in ownership and operation of open-air shopping centers. The company’s portfolio is concentrated in the top major metropolitan markets. It is on track with its 2020 Vision that envisages the ownership of high-quality assets concentrated in major metro markets, which offer several growth levers. In fact, despite transformation in the retail landscape, the company remains well poised to navigate through mall traffic blues, with focus on service and experiential tenants and omni-channel players.

Kimco Realty is scheduled to release its earnings figures on Jul 25.

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.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>