Indications from Fed officials on raising the key interest rate multiple times over the next two years have spread jitters in the REIT industry. But fiscal stimulus, like tax reduction and infrastructure spending expected under Donald Trump’s presidency, are likely to boost demand, fuel economic growth and push up inflation. And when economic growth picks up steam and inflation rises, prices of real estate generally increase while rent and occupancy of properties go up.
This should give sufficient boost to long-term investors to find good buying opportunities in the sector as many of REIT stocks with solid prospects are undervalued currently.
Moreover, with the majority of REITs yet to report this earnings season, the time is now to explore industry fundamentals and the past-quarter performance to figure out their chances of beating.
Usually an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation and ensuring more gains from one’s investments. Further, buying an earnings play with less initial investment, for their current low valuation, translates to great returns when the stock eventually trades at a higher price.
How to Select the Best Stocks?
However, selecting the best stock is a daunting task as not every REIT stocks is poised for a robust performance this earnings season. This is because, apart from the rate factor, the performance of REIT stocks depends on the individual asset class dynamics. In the fourth quarter, not all the asset categories showed solid strength in their fundamentals.
In fact, office and industrial asset categories hogged the limelight for experiencing high demand.
Going by numbers, per a study by the commercial real estate services’ firm CBRE Group Inc. (CBG), for the U.S. industrial market, availability fell for 26 straight quarters to 8.2% in the fourth quarter. Also, the overall office vacancy rate declined 10 basis points (bps) to 12.9% in fourth-quarter 2016, denoting the lowest level since first-quarter 2008.
However, supply issues in a number of markets have raised concerns for some of the residential REIT stocks. According to early apartment data from the AXIOMetrics, the fourth quarter witnessed a 1.2% sequential decrease in effective rents, marking a continuation of the trend of declining rents quarter over quarter. Also, occupancy of 94.7% in the fourth quarter was down from 95.1% in the third quarter and 95.0% in fourth quarter 2015. Also, dwindling mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks.
The Zacks Methodology
Amid these, 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 their fourth-quarter results:
Ashford Hospitality Prime Inc (AHP) has a Zacks Rank #2 and an Earnings ESP of +16.67%. The Zacks Consensus Estimate for the quarter is 30 cents per share. This indicates a year-over-year increase of nearly 37.3%.
Dallas, TX-based Ashford Hospitality Prime is focused on investing in high RevPAR full-service hotels and resorts located mainly in gateway markets.
Ashford Hospitality Prime is expected to report results on Feb 22.
CubeSmart (CUBE) carries a Zacks Rank #3 and has an Earnings ESP of +2.70%. The Zacks Consensus Estimate is pegged at 37 cents per share. The company posted an average positive surprise of 2.86% over the trailing four quarters.
CubeSmart is focused on the ownership, operation, acquisition and development of self-storage facilities in the United States. The company is based in Malvern, PA.
CubeSmart is slated to report results on Feb 16.
Boston Properties, Inc. (BXP) has a Zacks Rank #3 and an Earnings ESP of + 0.67%. The Zacks Consensus Estimate for the quarter is $1.50 per share. The company delivered positive surprises in three out of the trailing four quarters, with an average beat of 1.19%.
Massachusetts-based Boston Properties is one of the reputed owners and developers of premium office properties in the U. S. Its properties are concentrated in five core markets: Boston, Los Angeles, New York, San Francisco and Washington, DC.
Boston Properties is slated to report results on Jan 31.
Simon Property Group Inc (SPG) has a Zacks Rank #3 and an Earnings ESP of +0.39%. The Zacks Consensus Estimate is pegged at $2.59 per share. The company delivered positive earnings surprises in each of the last four quarters, with an average beat of 4.14%.
Based in Indianapolis, IN, Simon Property is a retail REIT engaged in the ownership, development, management, leasing, acquisition and expansion of income-producing properties, primarily malls, premium outlets and mills.
Simon Property is slated to release results on Jan 31.
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