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Earnings ESP

The U.S REIT sector has been showing an uptrend since mid-September after witnessing significant volatility since the middle of the year. This bullish run came on the back of the Fed’s ‘no taper’ decision (of its Quantitative Easing Program, or QE) and lower GDP projections for 2013 and 2014, which ensures a continued low interest rate environment in the near term.

Since mid-September, the REIT stocks have rallied the most of any sector and outperformed the S&P 500. On a total return basis, in September, the broadest U.S. REIT Index -- FTSE/NAREIT All REIT Index -- gained 3.55%, outpacing S&P 500’s growth of 3.14%. Subsequently, the FTSE/NAREIT All REIT Index return gained pace and came in at 6.13% on Oct 24, 2013, compared to 4.31% growth for the S&P 500.

As disappointing government job reports add to the GDP woes, we expect the Fed’s QE program to continue longer than previously anticipated. This should keep the demand for high-dividend-paying REIT stocks alive.

The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. Yield-hungry investors thus have a large appetite for such stocks. This has enabled the industry to stand out and gain footing over the last 15–20 years. As of Sep 30, 2013, the dividend yield of the FTSE NAREIT All REITs Index came in at 4.34%, outpacing the 2.14% dividend yield offered by the S&P 500.

Hence, with the REIT stage set for recovery, it might be a good idea to bet on a handful of REIT stocks that are scheduled to report their earnings in the coming days and are poised to beat estimates. An earnings beat will add to investors’ confidence in these stocks, leading to rapid price appreciation.

The Way to Pick the Right REITs

We make it fairly easy to choose the best stocks within the REIT industry. One way to narrow down the list is by looking for a combination of a favorable Zacks Rank -- Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) -- and a positive Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have a high chance of surprising with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are 3 REIT stocks that have the right combination of elements to deliver an earnings beat in the upcoming announcement:

Public Storage (PSA - Analyst Report) is a Zacks Rank #2 stock with an earnings ESP of +3.70%. The Zacks Consensus Estimate for the third quarter 2013 is $1.89 per share.

Glendale, California-based Public Storage is a leading self-storage REIT. The company acquires, develops, owns and operates self-storage facilities. Public Storage has facilities in 38 states of the U.S. and 7 Western European nations (operated under the “Shurgard” brand). The company also has a 41% common equity interest in PS Business Parks Inc. (PSB - Analyst Report), a REIT that has commercial properties in the U.S.

The company has registered an average positive earnings surprise of 1.94% over the trailing 12 months.

- Public Storage is scheduled to announce its third-quarter 2013 results after the market closes on Oct 31.

BRE Properties Inc. carries a Zacks Rank #2 and has an earnings ESP of +1.56%. The Zacks Consensus Estimate for the third quarter is 64 cents per share.

San Francisco, California-based BRE Properties Inc. is an apartment REIT that develops, acquires and manages communities predominantly in the chief metropolitan markets of Southern and Northern California, and Seattle. The properties of the company are usually located near business, transportation, employment and recreation centers of a city, which are essential for customers who value the convenience, service and flexibility of rental living.

The company has registered a positive earnings surprise in three out of last four quarters with an average beat of 2.08%.

- BRE Properties is scheduled to announce its third-quarter 2013 results after the market closes on Nov 4.

Cousins Properties Inc. (CUZ - Analyst Report) has a Zacks Rank #3 and an earnings ESP of +20.00%. The Zacks Consensus Estimate for the third quarter is pegged at 10 cents per share.

Atlanta, Georgia-based Cousins Properties Inc. mainly invests in Class-A office towers in Sunbelt markets of the U.S., with special focus on Georgia, Texas and North Carolina. With solid demographic trends, the high growth Sunbelt markets offer decent upside potential to this stock.

Moreover, the company has registered an average positive earnings surprise of 14.04% over the trailing 12 months.

- Cousins Properties is expected to announce its third-quarter 2013 results after the market closes on Oct 30.

Going Forward

With the continuation of the QE program and consequent low interest rate environment at least in the near term, REIT stocks are expected to enjoy a decent run. Moreover, even when the interest rate rises, the resultant economic improvement will create demand for properties offered by REITs.

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