The Minutes from the September Federal Open Market Committee meeting, which clearly signal a December rate hike, might keep investors in the REIT space worried. The Fed’s anticipation that the factors leading to a slowdown in inflation will eventually subside further enhances the chances of a rate hike.
However, it won’t be prudent to brood too much on a rate hike. Rather, the focus should be on the expected Q3 financial results of REITs based on the fundamentals of asset categories to which they cater to. Here, we will tell you why:
Forget Fed Moves
No doubt, for REITs, which depend on debt for their business and pay high and consistent dividend, a higher rate affects the present value of future cash flows. Therefore, asset valuation, including bond coupons and stock dividends, experiences a decline. But a rise in rates also lugs along scope for increasing future cash flows.
In fact, any decision by the Fed to increase rate mirrors growth in the domestic economy and the central bank’s confidence in the recovery. When economic growth picks up and inflation rises, prices of real estate generally increase. Consequently, rent and occupancy of properties go up. As such, REIT’s earnings, cash flow and dividend get a boost.
Focus on Underlying Asset Strengths
In fact, with the economy and the job market showing signs of recovery, a number of asset categories displayed strength in third-quarter 2017. Take for example the industrial asset category that has grabbed attention on the back of robust demand, recovering economy and job market, strengthening e-commerce market and healthy manufacturing environment.
Moreover, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. In fact, demand has been outpacing supply in top tier data center markets. Despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.
Going by numbers, per a study by the commercial real estate services’ firm, CBRE Group Inc. (CBG – Free Report) , the U.S. office vacancy rate declined to 12.9% in the third quarter amid growth in office-using jobs. In most of the U.S. office markets, vacancy declined, taking the national office vacancy rate close to its post-recession low.
Also, the U.S. apartment market reported stable rent growth, while occupancy remained healthy in the third quarter, per a study by the real estate technology and analytics firm, RealPage, Inc. (RP – Free Report) . For new leases, effective rents inched up 0.9% during the quarter and 2.6% annually. Further, apartment occupancy came in at 95.5% for the third quarter across the country’s top 100 metros.
Pick Stocks Poised to Beat in Q3
However, not all REITs from these asset categories are poised to excel. Therefore, in addition to focusing on REITs that have healthy underlying asset category fundamentals, investing in those that are yet to release their numbers and poised to beat expectations can be far more rewarding because an earnings beat essentially serves as a catalyst and raises investors’ confidence in a stock.
Nevertheless, 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, which takes into account a favorable rank — Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Our proprietary methodology, Earnings ESP, denotes the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. 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 five REITs that have the right combination of elements to deliver an earnings beat when they release third-quarter results:
Prologis Inc. (PLD – Free Report) carries a Zacks Rank #2 and has an Earnings ESP of +0.68%. The Zacks Consensus Estimate is pegged at 67 cents. The company delivered positive surprises in three of the last four quarters, with an average beat of 3.4%. It has an expected long-term growth rate of 4.6%. Also, the stock is trading at a discount to the industry average.
Based in San Francisco, CA, Prologis is an industrial REIT offering logistics real estate in the United States and abroad. The company focuses on high-barrier, high-growth markets.
Prologis is scheduled to report results on Oct 17.
CoreSite Realty Corporation (COR – Free Report) has a Zacks Rank #2 and an Earnings ESP of +0.76%. The Zacks Consensus Estimate for the quarter is pegged at $1.10. The company delivered positive surprises in three of the trailing four quarters, with an average beat of 3.63%. The stock is also trading at a discount to the industry average.
Denver, CO-based CoreSite Realty is a data center REIT engaged in providing secure, reliable, high-performance data center and interconnection solutions to a rising customer ecosystem across the eight key North American markets.
CoreSite is slated to report quarterly numbers on Oct 26.
The Zacks Consensus Estimate for Boston Properties Inc. (BXP – Free Report) is $1.54 per share. The company delivered positive surprises in two out of the trailing four quarters, with an average beat of 0.93%. Boston Properties has a Zacks Rank #3 and an Earnings ESP of +0.39%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Massachusetts-based Boston Properties is one of the reputable owners and developers of premium office properties in the United States. Its properties are concentrated in five core markets: Boston, Los Angeles, New York, San Francisco and Washington, DC.
Boston Properties is likely to report results on Nov 1.
Digital Realty Trust, Inc. (DLR – Free Report) has a Zacks Rank #2 and an Earnings ESP of +0.44%. The Zacks Consensus Estimate for the quarter is pegged at $1.49. The company has a long-term expected growth rate of 5.6%. The stock is also trading at a discount to the industry average.
Headquartered in San Francisco, CA, Digital Realty is a data center REIT offering data center, colocation and interconnection solutions for domestic and international tenants through its portfolio of data centers located throughout North America, Europe, Asia and Australia.
Digital Realty is slated to report quarterly numbers on Oct 25.
Apartment Investment and Management Company (AIV – Free Report) , commonly known as Aimco, has a Zacks Rank #3 and an Earnings ESP of +1.82%. The Zacks Consensus Estimate for the quarter is 62 cents. The company has a long-term expected growth rate of 6.1%.
Headquartered in Denver, CO, Aimco is a residential REIT engaged in the acquisition, ownership, management and redevelopment of apartment properties situated in some of the major coastal and job-growth markets in the United States.
Aimco is expected to report results on Oct 26.
Note: All earnings per share numbers presented in this report represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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