4 REITS Likely to Turn Out Winners This Earnings Season

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The second-quarter reporting cycle is underway, and investors can be lured by the profits of companies that have already released their quarterly figures. However, rather than adding the stock later to your portfolio, accumulating the ones poised to beat estimates can generate higher gains. This is because an earnings beat usually serves as a catalyst, raising investors’ confidence in the stock and resulting in price appreciation. This is likely to be reflected in the earnings releases of Simon Property Group SPG, Equity Residential EQR, W. P. Carey WPC and American Homes 4 Rent AMH.

Moreover, rather than fretting too much about Fed’s impending decision on rate hikes, focusing on REITs will be a smart move. This is because with the industry offering the real estate structure for several economic activities, be it real or virtual, there are pockets of strength even in a challenging environment.

For example, for REITs dealing with industrial real estate, we note that the U.S. industrial real estate sector, while exhibiting signs of normalization following the extraordinary demand spike during the pandemic, continues to project healthy fundamentals. Per a Cushman & Wakefield CWK report, net absorption for the second quarter measuring 44.9 million square feet (msf) marks a drop from the heights of the previous year. However, it is still in line with healthy pre-pandemic absorption levels. Leasing activity too mirrors this trend amid economic challenges. While the gross new leasing of 141.1 msf is down 8.9% from the first quarter, it is still in line with the quarterly average experienced from 2015 to 2019.

The second quarter saw a swift influx of new industrial supply, with a staggering 139.5 msf of new developments reaching completion. Amid this, the national vacancy rate increased by 60 basis points to 4.1%, surpassing the 4% mark for the first time since mid-2021. Despite the rise, the vacancy rate remains well below the 10-year average, suggesting a resilient market. Yet, despite softening market conditions, rents continued to rise. Second-quarter asking rental rates increased by 4.6% quarter over quarter, pushing the figure to $9.59 per square foot (psf).

In the case of the retail REITs, we note that according to a CWK report, the U.S. retail real estate market has continued to exhibit remarkable strength in the second quarter of 2023 despite uncertainties in the economic outlook and notable bankruptcies. The second quarter of 2023 witnessed a ninth consecutive quarter of positive net absorption in the retail market, totaling 7.1 msf nationally. The pace of absorption accelerated significantly compared to the first quarter, coming close to the average rate of the past year. New retail construction has remained subdued in the second quarter of 2023, with only 2 msf of space delivered nationwide.

The vacancy rate has dropped to 5.4% in the second quarter, down 60 basis points compared to the same period in 2022 and 80 basis points lower than the pre-pandemic rate. The limited new supply and robust demand have given landlords significant leverage in the market, leading to an increase in asking rents. On average, nationally, asking rents stood at $23.47 psf in the second quarter, representing a 4.7% year-over-year increase from the previous year.

Moreover, despite cooling rent growth, apartment demand is showing signs of a solid rebound, with net absorption in the second quarter of 2023 nearing surging new supply levels. This stabilizes occupancy rates after a steep decline in 2022. Per RealPage data, in the second quarter, net demand registered at 83,449 units, and this marked a five-quarter high. While this is still below the record numbers seen during the 2021 boom, it indicates a normalization of apartment demand. This demand rebound coincides with a 50-year high in apartment construction starting to convert into peak completions, with more than 107,000 units completed in the second quarter of this year itself.

However, despite the supply surge, this solid demand is aiding in the mitigation of vacancy spikes in most markets, with U.S. apartment occupancy coming at 94.7% as of June, marking only a 0.1 percentage point decline since January. It marks a notable improvement compared to the occupancy fall of 1.2 percentage points in the first half of 2022 and then an additional 1.4 percentage points in the second half of the year. However, rent growth remains below normal in 2023, with year-over-year effective asking rent growth at just 1.5%. This is due to apartment operators prioritizing occupancy rates over rents, leading to more options for renters and putting downward pressure on rent growth.

The Zacks Methodology

Picking the right stock could be difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, combining a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Research shows that for stocks with this combination of the Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.

Here are four REITs that have the right combination of elements to deliver positive surprises this season. Also, diversification benefits offered by real estate make these prudent investment choices now.

Simon Property Group currently carries a Zacks Rank of 3 and has an Earnings ESP of +1.42% for the quarter under review. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions and missed the same in the remaining period, the average beat being 0.32%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

In the second quarter, Simon Property is expected to have benefited from its portfolio of premium assets located in some of the key markets globally. Simon Property’s adoption of an omnichannel strategy and successful tie-ups with premium retailers are likely to have paid off well. Particularly, healthy retail demand is likely to have aided leasing activity and occupancy levels. Also, SPG is expected to have enjoyed a healthy balance-sheet position.

Simon Property Group is scheduled to announce second-quarter figures on Aug 2 after market close.

The Zacks Consensus Estimate of $1.33 billion for quarterly revenues suggests a 3.64% increase year over year. The consensus estimate for quarterly funds from operations (FFO) per share is currently pegged at $2.91.

Equity Residential carries a Zacks Rank of 2 and has an Earnings ESP of +0.83% for the to-be-reported quarter at present. Over the trailing four quarters, this residential REIT surpassed the Zacks Consensus Estimate on two occasions, met on one and missed the same on the other, the average surprise being 1.17%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Amid the rebound in apartment demand, Equity Residential’s quarterly performance is likely to have been supported by its portfolio diversification efforts in the urban and suburban markets. It has a healthy balance sheet and banks on technology, scale and organizational capabilities to drive growth.

Per Equity Residential’s May Investor Update presentation, leasing spreads, both for new leases and renewals, have been increasing up until May, setting the stage for a healthy summer leasing season. The blended rate has been showing improvement, with New York showing particularly strong momentum. Furthermore, Bad Debt, Net, has meaningfully improved beyond expectations due to an improvement in delinquency and an increase in move-outs from residents with high delinquent balances.

Equity Residential is set to release earnings results on Jul 27 after market close.

Currently, the Zacks Consensus Estimate for the company’s quarterly revenues stands at $715.13 million, indicating a 4.09% increase year over year. The Zacks Consensus Estimate for the quarterly normalized FFO per share of 94 cents suggests year-over-year growth of 5.6%.

W. P. Carey currently carries a Zacks Rank of 2 and has an Earnings ESP of +1.13% for the quarter under review. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on two occasions, met on another and missed once, the average beat being 1.56%.

W. P. Carey focuses on investing in high-quality, single-tenant, industrial, warehouse and retail properties. These are located mainly in the United States, and Northern and Western Europe. This diversified net lease REIT specializes in sale-leasebacks, build-to-suits and the acquisition of single-tenant net lease properties. WPC is poised to benefit from its portfolio of operationally-critical commercial real estate, which it leases back to creditworthy tenants on a long-term basis, with built-in rent escalators.

W. P. Carey is scheduled to release earnings on Jul 28 before market open.

The Zacks Consensus Estimate of $442.38 million for quarterly revenues suggests a 28.45% increase year over year. The consensus estimate for the quarterly FFO per share of $1.33 calls for a 1.53% year-over-year rise.

American Homes 4 Rent holds a Zacks Rank #2 and has an Earnings ESP of +3.24% at present. Over the trailing four quarters, AMH surpassed estimates on one occasion and met on the other three, the average surprise being 1.28%.

In the second quarter, AMH, which is the owner, operator and developer of single-family rental homes, is expected to have experienced advantages from favorable structural and secular trends, as well as the supply/demand imbalance that is currently favoring the single-family rental market.

American Homes 4 Rent is scheduled to report its quarterly figures on Jul 27 after market close.

The Zacks Consensus Estimate for quarterly revenues stands at $385.59 million, calling for a 6.55% year-over-year increase. The consensus mark for the second-quarter FFO per share of 40 cents implies 5.26% year-over-year growth.

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.

Equity Residential (EQR): Free Stock Analysis Report

Simon Property Group, Inc. (SPG): Free Stock Analysis Report

W.P. Carey Inc. (WPC): Free Stock Analysis Report

American Homes 4 Rent (AMH): Free Stock Analysis Report

Cushman & Wakefield PLC (CWK): Free Stock Analysis Report

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