A number of Q4 earnings releases are queued for this week, of which office REIT Boston Properties, Inc. (BXP - Free Report) and residential REIT Equity Residential (EQR - Free Report) are slated to report fourth-quarter 2018 results on Jan 29.
Notably, underlying asset categories and the location of properties play a crucial role in determining the performance of REITs. And there are reasons to cheer because the U.S. office real estate market has been gathering steam on the back of economic improvement and recovery in the job market. Furthermore, amid healthy growth in demand for office spaces, office landlords enjoy higher capability to raise rents for properties.
Per a study by the commercial real estate services firm — CBRE Group (CBRE - Free Report) — the fourth-quarter office vacancy rate declined to its lowest level in 11 years, by 10 basis points (bps) to 12.6%. Further, job growth boosted annual net absorption to 58.3 million square feet of space — the highest since 2015.
Moreover, the U.S. apartment market witnessed an encouraging fourth quarter in 2018, with accelerated rent growth and elevated occupancy level amid robust demand for rental units. Per a study by the real estate technology and analytics firm — RealPage, Inc. (RP - Free Report) — the annual pace of apartment rent growth in the United States picked up and reached 3.3% in the quarter, ahead of the 2.5% recorded in 2017. Also, occupancy came in at 95.4%, up from 95% reported at year-end 2017.
These apart, per the latest Earnings Preview, overall earnings for the finance sector, of which REITs are a part, in fourth-quarter 2018 are projected to rise 19.2% year over year, while revenues are expected to be up 3.0%.
Let’s take a look at what can be expected from the two above-mentioned REITs’ fourth-quarter and 2018 earnings.
Boston Properties is likely to have witnessed healthy demand for office space amid improving economic environment. Particularly, as the economy revives, existing business grows and therefore, corporate sectors seek expansion, renting more space to accommodate the increased workforce. Particularly, Boston and San Francisco, where the company has significant presence, witnessed rent growth of 6.5% or higher. The encouraging statistics are anticipated to have driven significant leasing activity and rental revenues in the company’s markets.
In fact, the Zacks Consensus Estimate for the base rent is $536 million, higher as compared to $526 million reported in the third quarter. Additionally, total rental revenues for the quarter are estimated to be $663 million, reflecting a projected increase of 1.2% sequentially. In addition, the Zacks Consensus Estimate for fourth-quarter funds from operations (FFO) per share is currently pegged at $1.68, indicating 12.7% growth from the year-ago quarter. (Read more: Boston Properties to Post Q4 Earnings: What's in Store?)
Boston Properties’ Earnings ESP is +0.33%. It currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, a positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Amid favorable environment in the residential real estate category, Equity Residential is expected to witness high average rental rate and occupancy of its properties in the to-be-reported quarter. Equity Residential is likely to benefit from its efforts to reposition the company’s portfolio in high barrier-to-entry/core markets. Specifically, favorable demographics, lifestyle transformation, and creation of households amid improving economy are likely to have driven demand for the company’s properties in the quarter and helped in absorption of new supply across its markets.
The Zacks Consensus Estimate for the fourth-quarter FFO per share is currently pegged at 85 cents, which indicates a projected increase of 2.41% year over year. This growth is expected to be backed by revenues and in fact, the Zacks Consensus Estimate for the company’s quarterly revenues is pinned at $650.0 million, highlighting anticipated growth of around 3.06% year over year. (Read more: Equity Residential Q4 Earnings: Is a Beat in Store?)
Further, with the residential REIT currently sporting a Zacks Rank #1 (Strong Buy) and having an Earnings ESP of +0.82%, the chances of a positive surprise are high.
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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