The current reporting cycle has already crossed the half-way mark and results are still pouring in from the real estate investment trust (REIT) industry. In fact, on Aug 2, a number of S&P 500 constituents – residential REIT AvalonBay Communities, Inc. (AVB - Free Report) , data center REIT Equinix, Inc. (EQIX - Free Report) , and retail REITs Federal Realty Investment Trust (FRT - Free Report) , GGP Inc. (GGP - Free Report) , The Macerich Company (MAC - Free Report) – are slated to release quarterly figures.
So far, results from the broader market revealed broad-based growth, record earnings tally, an abundance of positive surprises and favorable trends on the revisions front. (Read more: Q2 Earnings Season Past the Halfway Mark)
Nevertheless, the performance of the REIT sector has so far been mixed, with results from some of the top notch REIT stocks either matching estimates or beating, and a few others falling shy of expectations.
Admittedly, rate hike and cautious approach of investors have deterred gains from this industry so far this year. However, with underlying asset categories and the location of properties playing a crucial role in determining the performance of REITs, not all players in the space have equally excelled or fallen behind.
In fact, defying concerns about supply in the market, the residential real estate market is back with a bang, driven by robust demand levels. Per a study by the real estate technology and analytics firm, RealPage, Inc. (RP - Free Report) , the second-quarter demand level of 175,645 apartments across the nation marked one-third increase from the level witnessed a year ago. This helped occupancy to remain high at 95.0% as of mid-year and led to stabilization in the annual pace of rent growth, which came in at 3.6%, close to 3.7% growth experienced in the first quarter. Notably, job formation and checked move-outs for buying homes acted as the catalyst.
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.
On the other hand, we note that mall traffic continues to decline owing to a change in shopping patterns. Online purchases have taken precedence over in-store purchase. This has forced retailers to reconsider their strategy and shift investments from traditional retailing to online channels and optimize their brick-and-mortar presence.
While it is quite normal for retailers to do so, these optimization efforts and the consequent decision to close stores by a number of reputable retailers like Macy’s Inc. (M - Free Report) , Sears Holdings Corporation (SHLD) and JC Penney (JCP) in recent months, have raised concerns over cash flows of mall landlords. Also, retailers unable to cope with competition have been filing bankruptcies. This is resulting in higher vacancy in existing malls.
Therefore, not all players in the REIT space are equally poised to excel this time around. To predict that, 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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Per our proprietary methodology, Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Research shows that with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70% for the stocks.
We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Let’s have a look at what’s in store for the five REITs set to release second-quarter results on Wednesday:
Arlington, VA-based, residential REIT AvalonBay is well poised to grow on the back of a rising demand from household formation and favorable demographics. In addition, increasing consumer confidence, on the back of job growth, rising wages, and a healthier balance sheet, promise bright prospects for the company. The company is likely to continue experiencing high occupancy. Although pace of rental growth has slowed down from the previous years, it is now likely to achieve stability. (Read more: Can AvalonBay Pull Off A Surprise in Q2 Earnings?)
AvalonBay has an Earnings ESP of +0.94 %. This positive ESP combined with its Zacks Rank #3, increases the chances of a positive surprise this season.
Over the trailing four quarters, with respect to FFO per share, the company surpassed estimates in one occasion and missed in the other three. This resulted in an average negative surprise of 0.84%. The graph below depicts the surprise history of the company:
Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share.
Redwood City, CA-based data center REIT Equinix is a global provider of network-neutral data centers and internet exchange services for enterprises, content companies, systems integrators, and network service providers. The company operates across various geographical regions and its increasing popularity among major tech industry players looking for data management will likely drive revenues in the second quarter.
However, we remain slightly cautious about the huge capital outlays, which may dent Equinix’s second-quarter profitability. Growing debt burden will affect the company’s profitability in the quarter as interest expense would go up. (Read more: Equinix to Post Q2 Earnings: What's in the Offing?)
Equinix has an Earnings ESP of 0.00% and a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s zero ESP makes our surprise prediction difficult.
However, Equinix posted an average positive surprise of 20.96 % over the trailing four quarters, surpassing estimates in each occasions. The graph below depicts this surprise history.
Rockville, MD-based retail REIT Federal Realty’s portfolio of premium retail assets – mainly situated in the major coastal markets from Washington, D.C. to Boston, San Francisco and Los Angeles – along with a diverse tenant base, positions it well for decent growth.
Particularly, amid a fast changing retail environment, the company is making concerted efforts to reposition, redevelop and re-merchandise its portfolio. This includes an upgrade of the tenant mix. Such efforts are a strategic fit for the long term. However, their short-term adverse impact on occupancy and net operating income cannot be bypassed. Additionally, the choppy retail real estate environment is expected to adversely affect the company’s performance in Q2. (Read more: Federal Realty to Post Q2 Earnings: What's in Store?)
Presently, Federal Realty has an Earnings ESP of 0.00%. Although, a Zacks Rank #3 increases the predictive power of ESP, we need to have a positive ESP to be confident of an earnings beat.
Over the trailing four quarters, the company surpassed estimates on three occasions and missed in the other. This resulted in an average positive surprise of 0.53%. The graph below depicts the surprise history of the company.
Chicago, IL-based retail REIT GGP Inc. enjoys a robust portfolio of high-quality retail properties across attractive locations in the U.S., with the presence of renowned tenants. Hence, amid an improving economy and its omni channel retailing, the company is capable of generating decent cash flows.
However, with online purchases growing at a rapid pace, the retail real estate market has been crippling with issues like bankruptcies and downsizing of retailers. This is likely to curtail demand for the retail real estate space considerably. Although, the company has been making efforts to counter such pressure through various initiatives, such measures require significant upfront costs, which might limit near-term growth in profit margins. (Read more: Why GGP Q2 Earnings Might Disappoint Investors?)
GGP Inc. presently has an Earnings ESP of 0.00%. Also, its Zacks Rank #4 (Sell) reduces the predictive power of ESP.
Over the trailing four quarters, GGP Inc. delivered an in-line performance in each quarter. This is depicted in the chart below.
Santa Monica, CA-based retail REIT, Macerich, enjoys a portfolio of premium malls in vibrant U.S. markets. The presence of a number of well-capitalized retailers on its roster has enabled the company to maintain a stable source of rent for the past few quarters. However, decreasing footfall amid shift of consumers toward online channels, store closures and bankruptcy of retailers will likely mar the company’s Q2 performance. (Read more: Macerich to Report Q2 Earnings: What's in the Cards?)
Macerich has an Earnings ESP of +1.06%. This is a meaningful and leading indicator of a positive surprise in the quarter. However, the stock currently carries a Zacks Rank #4, which actually reduces the predictive power of ESP.
However, Macerich surpassed estimates in three of the trailing four quarters, witnessing an average positive surprise of 2.40%. The graph below depicts this surprise history.
Check later our full write-up on earnings releases of these stocks.
Note: 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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