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The Q3 earnings season has started on an impressive note, backed by the better-than-expected results from banks. In fact, per our latest Earnings Trends report, total earnings for the Finance Sector companies on the S&P 500 (accounting 41.5% of the total market cap), that have reported earnings so far, have climbed 20% year over year on 5.3% higher revenues.
Further, for the third quarter, as a whole, earnings of the finance sector, which includes REITs too, are expected to be up 54.1% on 6.8% higher revenues.
As for REITs, a number of companies are lined up for their earnings releases on Oct 23, including Equity Residential EQR, Liberty Property Trust LPT, Blackstone Mortgage Trust BXMT and PS Business Parks PSB.
Key economic indicators reflect an encouraging picture for the nation in 2018. However, escalating trade-war tensions and rising interest rates may have marred performance of many companies for the Sep-end quarter. Although economic strength and healthy consumer sentiment are encouraging, will these suffice to mitigate the impact of rate hikes that have kept investors in the REIT space worried as well?
Let’s find out by analyzing the factors that are expected to have played a key role in the above-mentioned REITs’ third-quarter 2018 performance.
Equity Residential is a Chicago, IL-based residential REIT which is expected to reflect growth in revenues and funds from operations (FFO) per share in the upcoming quarterly results.The company will likely benefit from its efforts to reposition the portfolio in high barrier-to-entry/core markets. Moreover, the company is poised for expansion amid economic recovery and job-market growth.
Nevertheless, Equity Residential has been experiencing substantial new supply across a number of markets. High supply is anticipated to continue straining new lease rates, occupancy and retention. Further, there is increased concession activity amid higher supply, which remains another concern.
Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate thrice, with an average positive surprise of around 0.93%. The graph below depicts this surprise history:
Equity Residential Price and EPS Surprise
Equity Residential Price and EPS Surprise | Equity Residential Quote
According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase its odds of an earnings surprise.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
In fact, the chances of the company beating the Zacks Consensus Estimate are less, although it has a Zacks Rank of 3. This is because it has an Earnings ESP of -1.38% (Read more: Equity Residential to Post Q3 Earnings: What's in the Offing?)
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Liberty Property has made notable progress on its portfolio-repositioning plan that aims at higher exposure to industrial properties, owing to strong fundamentals of this real estate asset class. This also reinforces the company’s capital-recycling program undertaken in 2017 to achieve a favorable portfolio mix.
Notably, in the to-be-reported quarter, the company shed its Arizona office portfolio for $255 million. Expanding its industrial platform, it purchased three industrial properties for an aggregate of $102.7 million. Also, the company has fortified its international presence, with the acquisition of a portfolio of seven industrial properties in the U.K. market, spanning 1.1 million square feet of space, for £111 million. (Read more: Liberty Property Issues Investment Activity Updates)
Furthermore, leasing activity in the quarter under review remained decent for the company. Among other notable lease agreements signed during the quarter, Liberty Property rented out space at 6035 Southern Boulevard, 1200 Intrepid Avenue, along with its assets in Richmond and Norfolk.
Also, rental revenues for the third quarter are pegged at $122 million which represents a sequential increase of 1.6%. Additionally, over the preceding four quarters, the company surpassed the Zacks Consensus Estimate in all occasions, with an average positive surprise of 5.09%. The graph below depicts this surprise history:
Liberty Property Trust Price and EPS Surprise
Liberty Property Trust Price and EPS Surprise | Liberty Property Trust Quote
Also, it is well poised to continue its beat streak, with a Zacks Rank of 3 and an Earnings ESP of +0.66%.
Blackstone Mortgage is a real estate finance and investment management company headquartered in New York. It is primarily involved in senior loan originations, collateralized by commercial real estate in North America and Europe.
Although the company has a sizable portfolio of floating rate senior loans, these are well matched with the company’s floating rate liabilities. This reduces variability caused by changes in the interest rates. In addition, loan originations by the company have been buoyed by its access to best-in-class capital markets. The Blackstone platform also supports the company’s performance.
For the quarter to be reported, revenues are anticipated to have increased 23.55% year over year to nearly $97.1 million.
Amid lack of any positive catalysts, the Zacks Consensus Estimate for third-quarter 2018 FFO per share remained unchanged at 67 cents over the last 30 days. It also indicates a year-over-year decline of 2.9%.
The graph below depicts the company’s earnings surprise history:
Capital Trust, Inc. Price and EPS Surprise
Capital Trust, Inc. Price and EPS Surprise | Capital Trust, Inc. Quote
With a Zacks Rank of 3 and Earnings ESP of 0.00%, chances of the company beating estimates this quarter is less likely.
PS Business Parks has made efforts to solidify its portfolio in the company’s six core markets. By acquiring under-performing assets at a discount to replacement costs, the company will likely emerge stronger amid improving industrial market fundamentals in the United States. It has also been disposing assets that do not fit in its growth strategies.
Although we expect these efforts to help the company achieve a better portfolio mix, dilution of near-term earnings due to these dispositions cannot be ignored.
Moreover, the Washington Metro market has been facing headwinds and the company lacks pricing power. Rent growth remains limited and in absence of any significant catalyst, the market is likely to be unimpressive in the near term. This is expected to have impacted the company’s performance in the Jul-Sep quarter. Also, supply is rising in certain submarkets and this could partly impede growth momentum.
Additionally, intense competition from developers, owners and operators of office properties is anticipated to impact its rent growth in the Sep-end quarter. The company’s revenues and FFO per share in the upcoming quarterly results may also display year-over-year declines. In fact, over the last month, the Zacks Consensus Estimate for third-quarter FFO has been revised downward by a cent.
The graph below depicts the company’s earnings surprise history:
PS Business Parks, Inc. Price and EPS Surprise
PS Business Parks, Inc. Price and EPS Surprise | PS Business Parks, Inc. Quote
With a Zacks Rank of 4 (Sell) and an Earnings ESP of -1.05%, chances of the company beating estimates this quarter are less.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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