As we stand in one of the busiest weeks of the current reporting cycle, investors can be lured by profits of companies that have already released their quarterly figures. But rather than adding the stock later to your portfolio, accumulating the ones that are yet to report and poised to beat estimates can generate higher gains. This is because an earnings beat usually serves as a catalyst, raising investors’ confidence in a stock and resulting in price appreciation.
And real estate investment trusts (REITs) are back in the limelight as after a soft performance in 2018, the sector emerged as a solid winner in 2019, with total returns of the FTSE Nareit All REITs Index growing 7.24% in the third quarter and 27.37% in the first nine months of 2019, outperforming the S&P 500’s rally of 1.70% and 20.55%, respectively, per data from REIT.com.
The macro-economic conditions have, undoubtedly, been encouraging for commercial and residential REITs. Particularly, moderate economic growth, low inflation and declining interest rates are anticipated to have driven REITs’ performance in the quarter to be reported.
For investors, their additions help in portfolio diversification. What’s more, REITs must pay at least 90% of their taxable income in dividends to shareholders, so these companies are a great option for income investors looking for steady payouts.
Furthermore, possibility of a third rate cut in October has intensified on the back of prolonged uncertainty about the U.S.-China trade tussle, global economic slowdown and weak U.S. economic data. The soft-rate environment benefits this rate-sensitive industry because REITs have traditionally depended on debt for their business. Moreover, REITs are considered as bond substitutes for their high-dividend paying nature.
These apart, fundamentals of a number of underlying asset categories of REITs displayed strength during the September-end period. Particularly, data-center REITs are witnessing a boom, with the growing popularity of cloud computing, Internet of Things and big data, as well as the use of third-party IT infrastructure by several companies. Moreover, in addition to driving the industrial REITs, e-commerce is propelling demand for data-center REITs as it offers critical infrastructure for the e-retail value chain.
In addition, the U.S. apartment market has put up an impressive performance in the past few months, successfully banking on the stellar rental-unit demand. While occupancy is hovering at a near-record level, rents continue to register a steady rise.
Per the latest report from real estate technology and analytics firm, RealPage, occupancy reached 96.3% as of third-quarter 2019, with an impressive leasing activity. The figure is not only up from the prior-year period’s 95.9%, but is also close to the all-time high of 96.4% attained almost two decades ago in late 2000. With an uptick in occupancy, rent growth also seems to be steady. For new leases, rents were up 1.2% during the third quarter, driving the annual rent growth pace to 3% and monthly rents averaging $1,416.
And if you assumed that retail REITs are falling behind due to store closures and bankruptcies, then you should reconsider your decision. This is because though the retail real estate market is undergoing structural changes, the recent data from Reis shows that the vacancy rate of neighborhood and community shopping center contracted 10 basis points sequentially to 10.1% in the third quarter. Both, national average asking rent and effective rent, which nets out landlord concessions, inched up 0.3% sequentially. However, the Regional Mall vacancy rate expanded 10 basis points sequentially to 9.4%. Nonetheless, rent growth was 0.2% in the quarter.
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:
Medical Properties Trust (MPW)
Medical Properties Trust, Inc. (NYSE:MPW) — also known as MPT — currently carries a Zacks Rank of 2 and has an Earnings ESP of 4.21%-plus. The Zacks Consensus Estimate for third-quarter funds from operations (FFO) per share has been revised upward in a month’s time to 32 cents. Moreover, the Zacks Consensus Estimate for third-quarter revenues of $203.6 million indicates a nearly 3.4% uptick year on year.
Headquartered at Birmingham, AL, MPT acquires and develops net-leased hospital facilities. The company remains focused to grow its funds from operations (FFO) on the back of immediately accretive acquisitions. In fact, increased opportunities in acute healthcare real estate with significant potential acquisition targets will likely fuel its growth engine.
MPT is expected to report quarterly figures around Nov. 7.
Stag Industrial, Inc. (STAG)
Stag Industrial, Inc. (NYSE:STAG) carries a Zacks Rank of 3, at present, and has an Earnings ESP of 1.1%-plus. The Zacks Consensus Estimate for the to-be-reported quarter’s FFO per share is pinned at 46 cents — marking projected year-over-year growth of 2.2%. The company came up with an average positive surprise of 1.12%, over the last four quarters. The July-September quarter revenues are estimated to be up 13.7% year over year to $101.1 million.
Boston, MA-based STAG Industrial is engaged in the acquisition and operation of single-tenant, industrial properties throughout the United States.
STAG Industrial is slated to report results on Oct. 30.
Realty Income Corporation (O)
Realty Income Corporation (NYSE:O) currently carries a Zacks Rank #2 and has an Earnings ESP of 0.30%-plus. The Zacks Consensus Estimate for the quarter under review’s FFO per share is pinned at 83 cents, indicating projected growth of 2.5%. Over the last four quarters, Realty Income beat estimates on all occasions, generating an average beat of 2.90%. It has a projected long-term growth rate of 3.9%.
San Diego, CA-based retail REIT Realty Income is engaged in acquisition and management of freestanding commercial properties that generate rental revenues under long-term net lease agreements. It derives more than 90% of its annualized retail rental revenues from tenants belonging to service, non-discretionary and low-price retail businesses. Such businesses are less susceptible to economic recessions, as well as competition from internet retailing. Along with its well-known commercial tenants, investors might love the fact that the firm pays a monthly dividend.
Realty Income is scheduled to release its earnings figures on Nov. 4.
Digital Realty Trust (DLR)
Digital Realty Trust, Inc. (NYSE:DLR) currently carries a Zacks Rank of 3 and has an Earnings ESP of 2.61%-plus. The Zacks Consensus Estimate for third-quarter FFO per share is pinned at $1.64 — calling for projected year-over-year growth of more than 0.6%. The company has been a steady performer, having outshined the Zacks Consensus Estimate in each of the preceding four quarters, the average beat being 1.67%. Quarterly revenues are estimated to be up 6% year over year to $815.0 million. The stock has an estimated long-term growth rate of 6.9%.
San Francisco, CA-based data center REIT Digital Realty offers data-center, colocation and inter-connection solutions for domestic and international tenants through its portfolio of data centers located across North America, Europe, Latin America, Asia and Australia.
Digital Realty is set to report its quarterly numbers on Oct. 29.
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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