3 Dividend Equity REITs to Buy for Strong Earnings and Forward Guidance

April 28, 2015 by 247lee

When a company posts strong earnings, shareholders are thrilled. When they post strong earnings and raise forward estimates and guidance, then you really have a perfect storm of data that can drive shares higher. In a new report from Jefferies, the real estate investment trust (REIT) analyst likes a group of companies that they expect to post very solid earnings reports, or that perhaps already have.

The Jefferies team singles out seven companies that they feel will report strong earnings, and three of those they also think will raise earnings guidance. Those are the three we focus on here: AvalonBay Communities Inc. (NYSE: AVB), Essex Property Trust Inc. (NYSE: ESS) and Extra Space Storage Inc. (NYSE: EXR). It is important to remember that REIT distributions may contain return of capital.

AvalonBay Communities

This company is in the business of developing, redeveloping, acquiring and managing apartment communities in the leading 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 United States. AvalonBay currently holds a direct or indirect ownership interest in 277 apartment communities containing 82,487 apartment homes in 11 states and the District of Columbia, of which 26 communities were under construction and eight communities were under reconstruction.

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By focusing on high-growth, high-demand areas in the Unites States, AvalonBay has become one of the premier apartment REITs on Wall Street. The Jefferies research indicates that channel occupancy rates are 0.5% to 1.5% higher for the first quarter of 2015, despite the fact the many REITs pushing rents higher and still fairly robust development pipelines. The analysts feel that this could drive growth acceleration, leading to strong earnings results being reported.

AvalonBay unitholders are paid a solid 2.9% distribution. The Jefferies price target is lifted from $195 to $198. The Thomson/First Call consensus price target is $182.05. The shares closed on Monday at $171.27. The company reported strong earnings after the close Monday, beating consensus estimates and raising guidance.

Essex Property Trust

This is another top apartment REIT, and the company is upgraded to Buy at Jefferies. The analysts think the already very strong West Coast business is getting even stronger for the company. Essex acquires, develops, redevelops and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 239 apartment communities, with an additional 12 properties in various stages of active development or in the initial leasing phase.

The stock does trade at a premium valuation to peers, and the Jefferies team points out that there is a very compelling reason why. Four of Essex’s top market locations, which make up close to 53% of revenues, are in the top 10 national apartment markets based on annual effective rent growth. An incredible 80% of the company’s total revenues are in the top 20 markets. The analysts also feel the strong start to 2015 indicates that overall 2015 fiscal year growth could be higher than senior management’s 5.6% assumptions for those markets. In other words, they could blow past expectations.

Essex unitholders are paid a solid 2.5% distribution. The Jefferies price target is moved from $250 to $267. The consensus target is $237.43. Essex closed Monday at $227.01. The company will report earnings on May 6.

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Extra Space Storage

Extra Space Storage owns or operates 1,088 self-storage properties in 35 states and in Washington, D.C., and Puerto Rico. Its properties include approximately 725,000 units and around 80.4 million square feet of rentable storage space offering customers conveniently located and secure storage solutions across the country, including boat storage, RV storage and business storage. The company is the second largest owner/operator of self-storage properties in the United States and is the largest self-storage management company in the United States.

Americans have stuff, and they need a place to put it. In fact, the Jefferies analysts are bullish on the storage space because occupancies and effective rental rates keep rising while the pace of acquisitions remains strong. The firm’s research points out that management teams at the storage REITs see an additional 0.5% to 1.5% of occupancy gains in 2015. While that may seem small, that is an immediate increase to top and bottom line numbers.

Extra Space Storage unitholders are paid a 2.8% distribution. The Jefferies price target is raised from $75 to $78. The consensus target is $68.65, and shares close Monday at $67.61. The company reports earnings April 29.

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While these may not be momentum dream trades, they are consistent growth REITs that pay a solid distribution. In a pricey market, they are a good place to park capital and see if we don’t get a re-rating of the overall market.