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4 Residential REITs Boosting Investor Hope With Solid Demand in Q2

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For the U.S. apartment market, the second quarter appeared to be robust this year, with renter demand soaring significantly. The number of occupied apartments in the nation’s 150 largest metros climbed 219,909 units, per a report from the real estate technology and analytics firm RealPage , aided by acceleration in employment growth that drives household formation and housing absorption.

This not only marks a significant increase from second-quarter 2020 when demand for apartments was limited to around 33,000 units, given the nationwide lockdown, but also the biggest quarterly upsurge observed in the RealPage, Inc. database.

The recovering economy and the job market progress are spurring household formation and demand for apartments. Surge in home prices and fewer for-sale product availability in the market, which are making it difficult for conversion of renters to homebuyers, are other drivers.

The Sun Belt metros continue to see healthy demand that have already proved their resilience amid the pandemic. However, the gateway markets too registered solid demand with considerable absorption, after witnessing a tepid environment last year that hurt fundamentals, with job losses and population declines, and a flexible working environment.

The current favorable environment is boosting occupancy levels and in turn, pushing up rents. Per a report from RealPage, occupancy is in line with the early 2000s all-time highs, with effective asking rents rising 2% in June, pushing up prices 6.3% year over year. The annual rent growth marks the biggest 12-month increase recorded since early 2001. Also, average monthly rent surpassed the $1,500 mark for the first time ever and reached $1,513. Rent growth has also been widespread.

Nonetheless, the struggle to lure renters is here to stay now, as supply volumes will likely remain elevated. During the June-end quarter, though demand was strong, completions were also substantial that aggregated 95,130 units. This trend is likely to continue in the rest of the current year as well, with the ongoing construction standing at 623,769 units, indicating a sizeable number of apartment deliveries in the upcoming period and suggesting that demand needs to be robust to get on with near-term deliveries.

Key Picks

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.

An earnings beat essentially serves as a catalyst, boosts investor confidence in a stock and triggers further price appreciation. Therefore, instead of accumulating stocks later, investing in the ones that are yet to report earnings and are poised for a beat can be far more rewarding.

Here are four residential REITs that have the right combination of elements to deliver positive surprises this season.

AvalonBay Communities, Inc. (AVB - Free Report) currently carries a Zacks Rank of 3 and has an Earnings ESP of +0.19%.

According to its second-quarter operating update, this residential REIT behemoth witnessed improvements in occupancy level as well as like-term effective rents in May. Also, the average asking rent climbed from fourth-quarter 2020, while the average concession per new move-in lease executed in May 2021 declined from the fourth-quarter level. (Read more: AvalonBay Sees Growth in May Occupancy, Asking Rent)

AvalonBay is slated to report second-quarter earnings on Jul 28, after market close. The Zacks Consensus Estimate for quarterly revenues is currently pegged at $551.8 million. The Zacks Consensus Estimate for the funds from operations (FFO) per share has moved marginally up to $1.93 in the past month.

Equity Residential (EQR - Free Report) carries a Zacks Rank of 3 and has an Earnings ESP of +1.43% for the to-be-reported quarter, at present.

This residential REIT is seeing an improvement in same-store physical occupancy for its residential properties. It has a healthy balance-sheet position, and is banking on technology and scale to drive innovation and margin expansion.

Equity Residential is slated to report April-June quarterly figures on Jul 27, following the market close. The Zacks Consensus Estimate for second-quarter revenues is currently pinned at $580.8 million. The consensus mark for the quarterly FFO per share has moved north to 70 cents in recent months.

Equity Residential Price and EPS Surprise

Equity Residential Price and EPS Surprise

Equity Residential price-eps-surprise | Equity Residential Quote

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Mid-America Apartment Communities (MAA - Free Report) holds a Zacks Rank of 3 and has an Earnings ESP of +2.65%, at present. The company surpassed estimates in each of the preceding four quarters, the average surprise being 2.08%.

This residential REIT is engaged in owning, acquiring, operating and development of apartment communities, located primarily in the Southeast, Southwest and Mid-Atlantic regions of the United States. Healthy demand for the company’s well-positioned Sunbelt properties will likely aid its performance in the days to come.

Mid-America will report April-June quarterly figures on Jul 28, after the bell. The Zacks Consensus Estimate for second-quarter quarter revenues is currently pinned at $429.2 million, calling for a 3.9% increase year on year. The estimate for quarterly FFO per share of $1.64 also suggests a 3.14% jump year over year.

UDR Inc. (UDR - Free Report) currently carries a Zacks Rank of 3 and has an Earnings ESP of +0.91% for the quarter under review.

UDR’s portfolio comprises properties throughout the United States, including both coastal and Sunbelt locations, and this residential REIT has raised its guidance ranges in light of the continued strength in operating fundamentals and accretive external growth. Solid demand for rental units is aiding physical occupancy and blended lease rate growth with increase in pricing power and reduction in concessions. (Read more: UDR Increases Outlook on Operating Fundamentals Strength)

UDR is scheduled to announce second-quarter figures on Jul 28, after the market close.The consensus mark for the to-be-reported quarter’s revenues is currently pegged at $301.5 million. The estimate for quarterly FFO per share currently stands at 49 cents.

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.