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Bet on These 4 REITs with Q4 Earnings Beat Potential

Moumita Chattopadhyay
RLI Corp. (RLI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

Investors can be lured by profits of companies that have already released earnings figures. However, rather than accumulating the stock later, investing in the ones which are yet to report and poised to beat, can fetch more gains. This is because an earnings beat serves as a catalyst, raises investors’ confidence in a stock and results in further price appreciation.

And if you believed that the December rate hike and possibilities of further increases in rates this year have put REITs on the back foot, then this is the right time to think again. Apart from the rate factor, underlying asset class dynamics play a vital role in determining the operating performance of REITs, and a number of asset categories have been displaying strength, of late.

These categories have been generating solid returns, at times even above the broader market. Most importantly, there is scope for increasing future cash flows because such asset categories have enough scope to excel in the future due to the presence of favorable market conditions.

Particularly, consider the e-commerce boom that has hugely affected mall traffic and compelled retailers to reconsider their business model in recent times. This same boom has created significant opportunity for the data centers, cell tower and industrial REITs that offer the critical infrastructure in the e-commerce value chain. In fact, according to a report from Prologis Inc. (PLD), for a given level of revenues, online retailers require three times the distribution center space compared with traditional retailers.

Also, going by numbers, per a study by the commercial real estate services’ firm CBRE Group Inc. (CBG), the overall U.S. office vacancy rate expanded 10 basis points (bps) to 13.0% during fourth-quarter 2017 amid an uptick in supply. Nevertheless, the national office vacancy rate still hovers near its post-recession low and vacancy continues to drop in majority of the U.S. office markets.

Although mall traffic has been severely affected and retail landlords have consequently felt the heat due to consumers’ preferences inclining more and more toward online retail, some other retail REITs are now focusing on grocery-anchored shopping centers. These centers are usually necessity driven and steer a dependable traffic, which augurs well for the industry. Moreover, groceries mark one of the major categories of U.S. consumer spending. Although online retailers like Amazon.com (AMZN) have made efforts to penetrate deeper into the grocery business, only a minimal percentage of U.S. grocery shopping takes place online.

Finally, instead of heavy dependence on apparel and accessories that can be purchased online, the REITs which are more focused on expanding dining options, opening movie theaters and offering recreational facilities are poised to gain because such strategic measures are likely to boost traffic at the properties.

The Zacks Methodology

However, in spite of the drivers, choosing the right stock could be quite 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 an earnings beat when they release fourth-quarter results:

Alexandria Real Estate Equities (ARE) has a Zacks Rank #2 and an Earnings ESP of + 0.65%. The Zacks Consensus Estimate for the quarter is pegged at $1.54, denoting year-over-year increase of roughly 8.5%. The company delivered positive surprises in two out of the trailing four quarters, with an average beat of 0.34%.

Pasadena, CA-based Alexandria Real Estate Equities, Inc. is an urban office real estate investment trust (REIT) with particular focus on collaborative life science and technology campuses. Notably, the fundamentals of the life-science industry remain robust and the company’s solid portfolio, consisting of Class A properties in upscale locations, enjoys strong demand as well. This enables the company to enjoy high occupancy and generate steady rental revenues from its properties.

Alexandria Real Estate Equities is set to report results on Jan 29.

Rexford Industrial Realty (REXR) has a Zacks Rank #2 and an Earnings ESP of +1.01%. The Zacks Consensus Estimate is pegged at 25 cents, which denotes expected year-over-year growth of 8.7%. Further, Rexford Industrial has a long-term growth rate of 7.7%.

Los Angeles, CA-based Rexford Industrial Realty is focused on acquisition, ownership and operation of industrial properties situated in Southern California in-fill markets. This industrial REIT is set to prosper given that a recovering economy and job market gains are driving this industry’s growth. Specifically, e-commerce boom and a healthy manufacturing environment have emerged as the chief drivers.

Rexford Industrial is scheduled to release results on Feb 13.

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

Regency Centers Corporation (REG) carries a Zacks Rank #3 and has an Earnings ESP of +0.25%. The Zacks Consensus Estimate is pegged at 92 cents. The company is a steady performer, having beaten the Zacks Consensus Estimate in each of the preceding four quarters, with an average positive surprise of 4.64%.

Jacksonville, FL-based Regency Centers Corporation is one of the leading publicly-traded retail REIT in the United States. Regency’s focus on building a premium portfolio of grocery-anchored shopping centers, which are usually necessity driven, along with the presence of leading grocers in its tenant roster, augurs well.

Regency Centers is slated to report results on Feb 8.

EPR Properties (EPR) has a Zacks Rank #3 and an Earnings ESP of +0.69%. The Zacks Consensus Estimate for the quarter is pegged at $1.44. This indicates year-over-year rise of nearly 15.2%.

Kansas City, MO-based EPR Properties is a specialty REIT trust that invests in three primary segments — Entertainment, Recreation and Education. Its properties include mega-plex theatres, entertainment retail centers, and destination recreational and specialty properties. Its focus on multiple-property types helps it beat the retail market blues.

EPR Properties is expected to report quarterly numbers around Feb 27.

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Regency Centers Corporation (REG) : Free Stock Analysis Report
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