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4 REIT Plays with Beat Potential in Q2 Earnings

Huge profits and earnings surprises can lure you this earnings season. But rather than accumulating stocks later, investing in those that are yet to release their numbers and poised to beat expectations can fetch you more gains. This is because an earnings beat essentially serves as a catalyst and raises investors’ confidence in a stock. This leads to rapid price appreciation, ensuring more gains from one’s investments.

Furthermore, buying an undervalued earnings play should translate into great returns when the stock eventually trades at a higher price. This brings us to the REIT industry, which has gained just 2.2% year to date compared with the S&P 500’s return of 10%.

Admittedly, rate hike and cautious approach of investors have deterred gains from this industry so far this year. However, rather than entirely focusing on the rate factor, investors need to keep in mind that the operating performance of this special hybrid asset is highly determined by the dynamics of the individual asset categories. And a number of asset categories displayed strength in second-quarter 2017, with the economy and the job market showing signs of recovery.

Take for example the industrial and office asset categories which hogged the limelight for experiencing high demand. Going by numbers, per a study by the commercial real estate services’ firm – CBRE Group Inc. (CBG) – the overall U.S. industrial real estate market remained upbeat in the second quarter, with the industrial availability rate declining 10 basis points to 7.8%.

This not only marked the market’s 27th decline in the past 28 quarters, but also the lowest level since first-quarter 2001. Obviously, recovering economy and job market gains aided this improvement, but specifically, e-commerce boom and a healthy manufacturing environment were the chief drivers. Also, lower-than-expected completions of construction kept a check on the supply numbers.

In addition, the U.S. office vacancy rate remained steady at 13% in the second quarter amid a balanced demand-supply environment. In around half of the U.S. office markets, vacancy recorded a decline and the national office vacancy rate is hovering close to its post-recession low.

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.

Additionally, 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), 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.   

The Zacks Methodology

However, not all REITs are equally poised to excel. In fact, despite the drivers, choosing the right stock could be quite difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, which takes into account a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

Our proprietary methodology, Earnings ESP, denotes the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. 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.

Here are four REITs that have the right combination of elements to deliver an earnings beat when they release second-quarter results:

Liberty Property Trust (LPT) carries a Zacks Rank #2 and has an Earnings ESP of +1.61%. The Zacks Consensus Estimate is pegged at 62 cents. The company delivered positive surprises in two of the last four quarters, with an average beat of 2.05%. It has expected long-term growth rate of 6.0%. Also, the stock is trading at a discount to the industry average.

Based in Malvern, PA, Liberty Property Trust provides leasing, property management, development, construction management, design management, and related services for a portfolio of industrial and office properties.

Liberty Property is scheduled to report results on Jul 25.

CyrusOne Inc. (CONE) has a Zacks Rank #2 and an Earnings ESP of +2.70%. The Zacks Consensus Estimate for the quarter is pegged at 74 cents. The company delivered positive surprises in each of the trailing four quarters, with an average beat of 7.96%. The stock is also trading at a discount to the industry average.

Dallas, TX-based CyrusOne is a data center REIT engaged in providing highly reliable enterprise-class, carrier-neutral data center properties. The company offers mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure for several customers, including Fortune 1000 companies.

CyrusOne is slated to report quarterly numbers on Aug 2.

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

Piedmont Office Realty Trust, Inc. (PDM) has a Zacks Rank #3 and an Earnings ESP of +2.27%. The Zacks Consensus Estimate is pegged at 44 cents, indicating anticipated growth of 9.5% year over year. The company delivered positive earnings surprises in three of the last four quarters, with an average beat of 1.76%. The stock is also trading at a discount to the industry average.

Based in Johns Creek, GA, Piedmont Office Realty is engaged in ownership, managing, developing and operation of high-quality, Class A office properties situated in select sub-markets of major U.S. cities.

Piedmont Office Realty is slated to release results on Aug 2.

AvalonBay Communities, Inc. (AVB) has a Zacks Rank #3 and an Earnings ESP of +0.47%. The Zacks Consensus Estimate for the quarter is $2.13, which denotes estimated year-over-year growth of 5.1%. The company has long-term expected growth rate of 7.3%, ahead of the industry average of 6.8%.

AvalonBay is a residential REIT primarily focused on developing and managing apartment communities in top metropolitan areas in New England, the New York/New Jersey Metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the U.S. The company has a principal executive office in Arlington, VA, and a number of regional offices, administrative offices or specialty offices in its markets.

AvalonBay is expected to report results on Aug 2.

Note: All earnings per share numbers presented in this report represent funds from operations (“FFO”) per share. 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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AvalonBay Communities, Inc. (AVB): Free Stock Analysis Report
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CyrusOne Inc (CONE): Free Stock Analysis Report
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