3 REITs to Benefit More from High Activities than Low Rates - Earnings ESP

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The Fed specified in its latest meeting that it would curb the bond buying program by another $10 billion to $25 billion a month, but gave no clue on the timing of the interest rate hike. The commitment of a low interest rate environment for a "considerable time" following the closure of the asset repurchase program was made with no specifics, leaving everyone in the lurch.

Obviously, the continuation of the low interest environment for some more time would give the REIT (real estate investment trust) shareholders a chance to rejoice, but we believe that time has now come to look beyond this rate sensitivity issue and focus on the other driving factors of this unique hybrid asset class.

Among the broader economic indicators, the Consumer Confidence Index, which is trending up for the third consecutive month, has grabbed much of our attention. This index reached 90.9 in July - its highest level since October 2007 - from 86.4 in June. The solid growth has been propelled by better job data and an optimistic short-term outlook for the economy.

This was further reinforced by an acknowledgement from the Fed about the rebound in economic activity and the improvement in the labor market conditions in its latest meeting.

A better economy translates into more activity for REITs as they own and manage income-producing real estate, such as apartments, offices, hotels, industrial or other facilities. Economic recovery is expected to propel demand for properties, thereby encouraging more rent and occupancy levels.  

Naturally, higher employment means more space to accommodate these workers. On the other hand, people getting hired or carrying on with their current job contract would have more means to rent an apartment instead of living with their parents or in smaller units. The rise in personal income also paves way for more shopping, dining, entertaining outside; thereby, catapulting to enhanced footfall at malls. Apart from these, in this environment, leisure trips and business travels also increase, leading to a rise in demand for hotels.

In addition, the sluggish pace of economic recovery in the past limited robust growth in supply, resulting in greater scope for existing owners to enjoy higher demand for their properties. However, the Fed pointed at underutilization of labor resources and weak activity in the housing sector, indicating that there might be some more time until it makes any rate hike.

How to Pick Stocks? 

Amid this environment, picking the right stock from several sub sectors in the REIT space could be a difficult task. But an easy way is to screen them with favorable Zacks Rank - Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .

Our proprietary methodology - Earnings ESP - determines stocks having the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.


Unquestionably, an earnings beat reinforce investors' confidence on the stocks and result in quick price appreciation. Along with the solid dividend income that these REITs offer, investing in these stocks guarantees encouraging returns. Moreover, we believe that the market correction on Thursday, due to the concerns emanating from Russia and overseas economies, offers further motivation to add these better-positioned REITs at a cheaper price.

Essex Property Trust Inc. ( ESS ) has a Zacks Rank #3 and an earnings ESP of +18.24%. The Zacks Consensus Estimate for the second quarter for this residential REIT is pegged at $1.70 per share. It has a long-term expected growth rate of 8.1%.

California-based Essex Property accomplished the merger with BRE Properties on Apr 1, thereby creating a premium West Coast multifamily REIT. It was also added to the S&P 500 Index on the same day. In the West Coast, strong growth in jobs amid a lower supply of properties in the market keeps the demand momentum robust. And with an enhanced property base and strong management team, we believe that Essex can efficiently leverage on attractive market fundamentals and reward shareholders accordingly.

- Essex Property is expected to announce its second-quarter results after market close on Aug 6.

Chesapeake Lodging Trust ( CHSP ) is a Zacks Rank #3 stock with an earnings ESP of +4.84%. The Zacks Consensus Estimate for the second quarter is 62 cents per share. The company delivered a positive earnings surprise in all the last four quarters with an average beat of 7.73 %. The stock also has a long-term expected growth rate of 8.0%.

Based in Annapolis, MD this lodging REIT focuses on investing mainly in upper-upscale hotels in key business and convention markets, which have high barriers-to-entry. Favorable hotel supply and demand fundamentals in its geographic markets, asset management efforts together with the accomplishment of its major repositioning projects are expected to lead to positive operating trends for this REIT.

- Chesapeake Lodging is scheduled to announce its second -quarter results after market close on Aug 4.

Parkway Properties Inc. ( PKY ) carries a Zacks Rank #3 and has an earnings ESP of + 6.06%. The Zacks Consensus Estimate for the second quarter is 33 cents per share. The company delivered a positive earnings surprise in all the last four quarters with an average beat of 46.45 %. The stock also has a long-term expected growth rate of 14.7%.

Orlando, FL based Parkway Properties acquires, owns, develops and manages office properties in high-growth submarkets in the Sunbelt region of the U.S. The company's high-quality acquisitions across its core markets and favorable lease economics are expected to drive its fundamentals. And an improving economy is expected to add to the bliss.

- Parkway Properties is scheduled to announce its second-quarter results after market close on Aug 7.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Earnings

Referenced Stocks: ESS , CHSP , PKY

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