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REITs to Watch for Q3 Earnings on Oct 29: AVB, ESS & More

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As we are about to enter another eventful week of the current reporting cycle, real estate investment trust (REIT) will be seeing a really busy Monday next week..

A number of firms are lined up for their earnings releases, and among those are residential REITs AvalonBay Communities, Inc. (AVB - Free Report) , Essex Property Trust, Inc. (ESS - Free Report) and UDR Inc. (UDR - Free Report) . Also, office REIT Alexandria Real Estate Equities, Inc. (ARE - Free Report) , and Vornado Realty Trust (VNO - Free Report) , that has office as well as retail assets, are slated to report their quarterly figures the same day.

A number of rate hikes in this year so far and possibilities of further increases have kept investors in the REIT space worried to some extent. However, underlying asset categories and location of properties play a crucial role in determining the performance of REITs.

For the U.S. apartment market, the third quarter of this year proved to be an encouraging one, with accelerating rent growth and increasing occupancy level. In fact, rents grew at an annual pace of 2.9% in the quarter, reversing the pattern of slowing price hikes since late 2015, per a study by the real estate technology and analytics firm, RealPage, Inc. . Also, occupancy came in at 95.8%, up from 95.4% reported in the second quarter.

Also, going by numbers, per a study by the commercial real estate services’ firm — CBRE Group Inc. — the overall U.S. office vacancy rate contracted 10 basis points (bps) to 12.8% during third-quarter 2018 amid strong net absorption. This also marked the lowest rate since Q4 2007.

On the other hand, the U.S. retail real estate industry has been reeling under pressure from store closures and retailer bankruptcies, and the recent data from Reis shows that the regional mall vacancy rate jumped to 9.1% in the third quarter, from 8.6% in the prior quarter. For Neighborhood and Community malls, the vacancy rate was 10.2% in the quarter under review, unchanged sequentially, and up from 10.0% in Q3 2017.

Amid these, surprises might be in store for some REITs, while others may disappoint this earnings season. Therefore, let’s find out by analyzing the factors that are expected to have played a key role in the above-mentioned REITs’ third-quarter 2018 performance.

Residential REIT AvalonBay is expected to benefit from high-quality assets in premium locations, favorable demographics, household formation, recovering economy and job market growth. The company’s performance in the Sep-end quarter is likely to display continued high occupancy. The company is also expected to have maintained its decent balance-sheet strength.

Nonetheless, new apartment deliveries are anticipated to have remained elevated in the company’s markets in the quarter. This high supply is likely to put pressure on its rental rates. Furthermore, high concession activity amid elevated supply remains a concern. In addition, rate hike adds to its woes. (Read more: Key Factors to Impact AvalonBay This Earnings Season)

According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase its odds of an earnings surprise.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The chances of AvalonBay beating the Zacks Consensus Estimate are less, although it has a Zacks Rank of 3. This is because it has an Earnings ESP of -0.58%.

Over the trailing four quarters, the company surpassed estimates in two occasions, met in another and missed in the other. This resulted in an average negative surprise of 0.44%. The graph below depicts the surprise history of the company:

San Mateo, CA-based residential REIT Essex Property Trust has a sturdy property base and an efficient management team. The company’s substantial exposure to the West Coast market also offers ample scope to boost its top line.

Notably, the West Coast is home to several innovation and technology companies. The region is witnessing solid job growth, higher wages, increased percentage of renters than owners, and favorable migration trends with the influx of workers to its markets, mainly from the major East Coast markets. These factors are expected to spur demand for renting units in its market and drive revenues. Nevertheless, significant apartment delivery in a number of its markets is likely to have led to high rental concessions and moderate pricing power of the company. (Read more: What's in the Offing for Essex Property Q3 Earnings?)

The chances of the company beating the Zacks Consensus Estimate are less, although it has a Zacks Rank of 3. This is because it has an Earnings ESP of -0.15%.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate in three occasions and met in the other, the average beat being 0.82%. This is depicted in the graph below:

Denver, CO-based residential REIT UDR is likely to benefit from its vast experience in the residential real estate market. The company’s portfolio, located in the targeted U.S. markets, has a superior product-mix. Favorable demographics, household formation amid a recovering economy and job market growth are expected to drive demand for UDR's properties in the quarter. It also adheres to disciplined capital allocation.

Therefore, despite supply issues plaguing the market, occupancy is likely to be higher. The Zacks Consensus Estimate for third-quarter revenues is currently pegged at $258.6 million, indicating 3% year-over-year growth.(Read more: Will UDR Come Up With a Positive Surprise in Q3 Earnings?)

UDR’s positive Earnings ESP of +0.68%, when combined with a favorable Zacks Rank of #2 (Buy), makes us reasonably confident of a positive surprise.

In the last four quarters, the company surpassed the Zacks Consensus Estimate in one occasion and matched the same in the remaining three.

Alexandria Real Estate Equities, the Pasadena, CA-based urban office REIT, which primarily focuses on collaborative life science and technology campuses, is expected to have witnessed solid demand trends from life science and tech tenants during the Jul-Sep quarter. Amid favorable operating environment, the company is anticipated to have witnessed healthy rent escalations and leasing activity. This is expected to have bolstered the company’s third-quarter revenues. In fact, the Zacks Consensus Estimate for the same is pegged at $334.7 million and reflects a year-over-year jump of 17.3%.

Nonetheless, amid rising construction-cost environment, the company is expected to have witnessed cost overruns for its development projects. Lastly, the rising interest-rate environment remains a challenge, since the company has exposure to long-term leased assets. Also, it is expected to have escalated the company’s financing cost. (Read more: Alexandria to Post Q3 Earnings: What's in the Offing?)

Alexandria’s Earnings ESP is 0.00%.The company carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

In the preceding four quarters, the company beat the estimates in two occasions, missed in another and met in the other. It delivered an average positive surprise of 0.48% during this period. The graph below depicts this surprise history:

NY-based, Vornado has a portfolio of premium assets that mainly includes office and retail properties and is concentrated in the New York City. The company has a diverse tenant base. Vornado’s efforts to strengthen its retail portfolio in high-rent markets like Manhattan are a strategic fit. This will likely support its top-line performance. Further, the company is exiting non-core investments through strategic divestures. This is expected to have provided the company with the dry powder to reinvest in opportunistic acquisitions.

Importantly, the company announced that the third-quarter 2018 financial results will include certain items that will decrease its FFO per share, including assumed conversions by 2 cents. However, this amount will be excluded in the adjusted FFO plus assumed conversions per share figure. Also, the dilutive effect on earnings from aggressive disposition of assets is expected to have weighed on the company’s bottom-line growth in the quarter under review. Stiff competition from other market players and rise in interest rates add to its woes. (Read more: Vornado Realty to Post Q3 Earnings: What Lies Ahead?)

Although Vornado currently carries a Zacks Rank of 3, its Earnings ESP of -1.21% lowers the chance of a positive surprise in the quarter.

Over the trailing four quarters, Vornado outpaced the Zacks Consensus Estimate in all occasions, witnessing an average positive surprise of 6.04%. This is depicted in the graph below:

Vornado Realty Trust Price and EPS Surprise

Vornado Realty Trust Price and EPS Surprise | Vornado Realty Trust Quote

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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