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4 Top REITs Buoying Investors' Optimism This Earnings Season

Moumita C. Chattopadhyay

It is natural for investors to be lured by profits and surprises of companies that have already released their quarterly numbers by far in the current reporting cycle. However, instead of accumulating the stock later, investing in the ones that are poised for a beat can be far more rewarding. This is because earnings beat essentially serves as a catalyst, boosts investors’ confidence in a stock and results in further price appreciation.

And 2019 was a good year for REIT investors because apart from providing long-term growth benefits, recurring income was strong, which made it stand apart particularly in the current low-rate environment. The total return for the FTSE NAREIT All REIT Index was 28.07% in 2019 and dividend yield amounted to 4.06% compared with the S&P 500’s 1.85%.

The Fed’s three interest rate cuts in 2019, following the hike in 2018, did bring in good news for REIT stocks, but individual market dynamics played a crucial role in determining the companies’ performance. Particularly, the macro-economic conditions have been encouraging for a number of asset classes, benefiting both commercial and residential REITs. Moreover, in the fourth quarter, resilient economic activity, healthy job-market environment, low interest rates are anticipated to have driven REITs’ performance during this period.

Take for example the industrial real estate market, which is likely to have witnessed solid fundamentals in the quarter. In fact, with growing e-commerce penetration and companies’ immense efforts to improve supply-chain efficiencies, the demand for logistics infrastructure and efficient distribution networks has been on the rise, thereby supporting fundamentals of the industrial and logistics market.

In addition, the latest figures from real estate technology and analytics firm RealPage, Inc. RP suggest that following a robust prime leasing season in 2019, the U.S. apartment rental market put up a decent show in the December-end quarter, despite demand for apartments generally slowing down during the colder months as renters usually prefer less to move in winters. Occupancy at the end of fourth-quarter 2019 remained as high as 95.8%, reflecting 40 basis points (bps) expansion, year on year. Moreover, rents for new-resident leases were up 2.8% in 2019, hovering around the 3% level that the apartment market has been witnessing since late 2016.

The U.S. office market remained healthy in fourth-quarter 2019, aided by occupancy growth across a number of markets. In fact, per a report by REIS, office vacancy rate was 16.8% in October-December period, unchanged sequentially. Occupancy growth was healthy in the quarter, as demonstrated by a surge in net absorption and helped drive 0.5% sequential growth in both national average asking rent and effective rent.

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 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. Also, the diversification benefits that real estates offer make them prudent investment choices now.

Rexford Industrial Realty REXR currently carries a Zacks Rank #2 and has an Earnings ESP of +4.17%. The Zacks Consensus Estimate for this industrial REIT’s fourth-quarter funds from operations (FFO) per share is pegged at 31 cents, suggesting year-over-year growth of 6.9%, backed by a projected increase of 25.1% in revenues. Further, Rexford Industrial has a long-term growth rate of 7.1%.

Los Angeles, CA-based Rexford Industrial Realty is focused on acquisition, ownership and operation of industrial properties situated in Southern California in-fill markets.

Rexford Industrial is expected to report quarterly figures around Feb 11.

SL Green Realty Corp. SLG currently carries a Zacks Rank of 2 and has an Earnings ESP of +0.35% for the fourth quarter. The Zacks Consensus Estimate for this office REIT’s quarterly FFO per share has been revised marginally upward in a month’s time to $1.74, indicating year-over-year growth of 8.1%.

SL Green primarily acquires, manages, develops and leases commercial office properties in the New York Metropolitan area, especially midtown Manhattan. This S&P 500 company also makes investments in Brooklyn, Westchester County and Connecticut.

SL Green is scheduled to release its earnings figures on Jan 22.

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

Camden Property Trust CPT currently carries a Zacks Rank #2 and has an Earnings ESP of +3.75%. The Zacks Consensus Estimate for the quarter under review’s FFO per share moved 1.6% upward to $1.24 in a week’s time. The residential REIT’s revenues are also projected to increase 7.2% year on year.

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

Camden Property Trust is set to report its quarterly numbers on Jan 30.

Apartment Investment and Management Company AIV, also known as Aimco, is another promising residential REIT at present, backed by its redevelopment and development efforts to improve portfolio quality. It holds a Zacks Rank #2 and has an Earnings ESP of +0.77%, at present. The REIT has a projected long-term growth rate of 5.2%. The Zacks Consensus Estimate for the fourth quarter’s FFO per share moved 1.6% north over the last 60 days to 65 cents.

Denver, CO-based residential REIT Aimco is focused on the ownership and management of quality apartment communities situated in the largest markets in the United States.

Aimco is scheduled to report its quarterly numbers on Jan 30.

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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