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REITs to Watch for Q4 Earnings on Jan 29: ESS, MAA & DRE

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A number of Q4 earnings releases are queued for this week, including residential REITs Essex Property Trust, Inc. ESS and Mid-America Apartment Communities, Inc. (MAA - Free Report) , as well as industrial REIT Duke Realty Corporation DRE slated to report their quarterly numbers on Jan 29.

The macro-economic conditions have been encouraging for commercial and residential REITs. Particularly, resilient economic activity, healthy job-market environment and low interest rates are anticipated to have driven REITs’ performance in the quarter to be reported. However, the uptick in supply in certain asset categories might have intensified competition and curbed any robust growth tempo in terms of rent and occupancy growth.

Therefore, with underlying asset categories and the location of properties playing a crucial role in determining REITs’ performance, delving into the asset fundamentals and markets of each REIT becomes all the more important.

The latest figures from real estate technology and analytics firm RealPage, Inc. RP suggest that following a robust prime leasing season in 2019, the U.S. apartment rental market put up a decent show in the December-end quarter, despite demand for apartments generally slowing down during the colder months, as renters usually prefer less to move in winters. Occupancy at the end of fourth-quarter 2019 remained as high as 95.8%, reflecting 40 basis points (bps) expansion, year on year. In addition, rents for new-resident leases were up 2.8% in 2019, hovering around the 3% level that the apartment market has been witnessing since late 2016.

Moreover, per a report from Newmark Knight Frank, the robust demand for industrial real estate has continued to push pricing higher, while the vacancy rate hovers near the cyclical low. Particularly, in the fourth quarter, average industrial asking rent across the United States measured $7.41 per square feet, denoting 4.5% increase year-over-year, as well as the highest quarterly average recorded this cycle. Vacancy rate too remained low at 5.2% at the end of 2019, however, expanded 10 basis points from the prior quarter and 30 basis points, year on year. Nevertheless, vacancy has been very tight in a number of key markets.

Let’s analyze the factors that are expected to have played a key role in the above-mentioned REITs’ fourth-quarter performance.

Essex Property Trust is slated to report quarterly numbers after market close. Our proven model predicts a beat in terms of FFO per share for Essex Property this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of a beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Essex Property currently carries a Zacks Rank of 3 and has an Earnings ESP of +0.09%.

With a solid balance sheet, Essex Property is likely to leverage on favorable demographic trends, household formation and job-market growth in its markets. Substantial exposure to the West Coast market, which is home to several innovation and technology companies, is anticipated to have provided ample scope to bolster its top-line growth in the quarter under review. In fact, the region has been witnessing solid job growth, higher wages, increased percentage of renters than owners and favorable migration trends. Further, transition from renter to homeowner is difficult in its markets due to high cost of homeownership. These are likely to have favorably impacted rental housing demand during the period under consideration. (Read more: Key Factors to Impact Essex Property's Q4 Earnings)

The Zacks Consensus Estimate for fourth-quarter revenues of $373.6 million indicates a 5.8% improvement, year on year. In addition, the company estimates core FFO per share of $3.36-$3.46 for the quarter. Although, the Zacks Consensus Estimate for FFO per share for the quarter remained unchanged in the past two months at $3.42, it reflects 7.2% growth from the prior-year quarter’s reported tally.

Over the last four quarters, the company beat the Zacks Consensus Estimate on two occasions, met in another and missed in the other, the average beat being 0.78%. This is depicted in the graph below:

Essex Property Trust, Inc. Price and EPS Surprise

Essex Property Trust, Inc. Price and EPS Surprise

Essex Property Trust, Inc. price-eps-surprise | Essex Property Trust, Inc. Quote

Mid-America Apartment Communities — commonly known as MAA — is slated to report fourth-quarter results after market close. Notably, demand for the company’s portfolio is likely to have been elevated, with strong job growth across the company’s Sunbelt markets. Also, positive demographic trend, supported by growth of prime age groups for rentals, and migration of population to the Sunbelt, are expected to have fueled household formation and apartment rental demand in its markets, leading to healthy trends in rent growth.

Further, MAA’s redevelopment program that entails interior upgrades is anticipated to have attracted renters. These upgrades provide the residential REIT with higher pricing power, thereby driving top-line growth. In fact, the Zacks Consensus Estimate for fourth-quarter 2019 revenues is pinned at $416 million, calling for a year-over-year improvement of 4.5%.

Nevertheless, the struggle to lure renters is likely to have continued in the October-December period, as supply volumes were high in a number of the company’s markets. Also, MAA’s activities during this period were inadequate to gain analysts’ confidence. The Zacks Consensus Estimate for fourth-quarter 2019 FFO per share has remained unchanged in the past two months at $1.63. The figure indicates a year-over-year increase of 5.2%. (Read more: Factors to Impact Mid-America Apartment Q4 Earnings)

Although MAA currently carries a Zacks Rank of 3, its Earnings ESP of -0.53% makes surprise prediction difficult.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on two occasions, missed in the other and met in another, the average positive surprise being 1.66%. This is depicted in the chart below:

Duke Realty Corp. is slated to report quarterly results after the closing bell. The company’s solid capacity to bank on this favorable trend is likely to have helped witness active leasing and healthy rent levels across a number of properties in the December-end quarter. It focuses on having facilities in major MSAs, and key trucking, rail, air cargo and shipping corridors. Such locations help generate solid demand from e-commerce and traditional distribution customers for its industrial properties.

This environment of stout growth has, however, attracted many developers, resulting in an increase in construction pipeline and delivery of industrial space. Also, the estimate for fourth-quarter general contractor and service fee revenues is $2.9 million, indicating a steep decline from the quarter-ago tally of $25.9 million. (Read more: What's in the Offing for Duke Realty's Q4 Earnings?)

Amid these, prior to the fourth-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the quarter remained unchanged at 38 cents, over the past 30 days. Nevertheless, the figure suggests a year-over-year increase of 8.6%.

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for this industrial REIT this season, as Duke Realty currently carries a Zacks Rank of 4 (Sell) and has Earnings ESP of 0.00%.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on two occasions and met estimates in the other two, the average beat being 1.5%. The graph below depicts this surprise history:

Duke Realty Corporation Price and EPS Surprise

Duke Realty Corporation Price and EPS Surprise

Duke Realty Corporation price-eps-surprise | Duke Realty Corporation 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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