A number of firms in the REIT industry are lined up for their earnings releases tomorrow, including, Apartment Investment and Management Company AIV , Equinix, Inc. EQIX and Host Hotels & Resorts, Inc. HST .
Admittedly, several rate hikes in this year so far and possibilities of further increases have kept investors in the REIT space worried to some extent. But, apart from rate hike issues, individual market dynamics of the underlying asset category play a pivotal role in determining the performance of REITs.
Therefore, if an improving economy, job-market gains, corporate profits and tax cuts are spurring demand for numerous asset categories, rising supply, evolving trade policies, aggressive competition and several such issues are softening fundamentals and limiting the scope of growing future cash flows from the properties of related REITs.
Amid these, surprises might be in store for some REITs, while others may disappoint this earnings season. Therefore, let's find out by analyzing the factors that are expected to have played a key role in the above-mentioned REITs' third-quarter 2018 performance.
Residential REIT Apartment Investment & Management Co.
(AIV) - commonly known as Aimco - focuses on having a solid portfolio, diversified in terms of geography and price point. This might help in partly avoiding its exposure to competitive new building supply. Additionally, the company is anticipated to gain from favorable demographics, household formation, recovering economy and job-market growth. Also, the company is making diligent efforts to improve its portfolio mix through property sales, and reinvesting the proceeds in acquisitions, capital enhancements, redevelopments and occasional developments.
However, apartment deliveries are expected to have remained elevated in a number of the company's markets in the third quarter. Such an environment is predicted to have resulted in aggressive rental concessions and moderate pricing power of landlords. Moreover, though portfolio-streamlining efforts are a strategic fit for the long term, the near-term dilutive effect cannot be bypassed. In fact, such short-term impact is likely to depress the company's quarterly results. Further, rate hikes are a concern as amid rising rates, financing costs will flare up. (Read more: Will Elevated Supply Dampen Aimco's Earnings in Q3?
According to our quantitative model, a company needs the right combination of two key ingredients - a positive Earnings ESP
and a Zacks Rank #3 (Hold) or better - to increase its odds of an earnings surprise.
You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter
The chances of Aimco beating the Zacks Consensus Estimate are less, although it has an Earnings ESP of +0.18%. This is because it has a Zacks Rank of 4 (Sell), currently.
Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in one occasion, reported in-line numbers in the other two and missed in another. This resulted in an average surprise of 0.00%. This is depicted in the chart below:
Apartment Investment and Management Company Price and EPS Surprise
Apartment Investment and Management Company Price and EPS Surprise | Apartment Investment and Management Company Quote
In the third quarter, global connectivity leader Equinix continued its inorganic strategy of expanding in key markets on the back of acquisitions and joint ventures (JV). However, rising interest rates may impede the company's bottom-line growth for the to-be-reported quarter. It has significant debt outstanding that exposes it to interest rate hikes. Furthermore, to expand its global footprint and initiate new projects, the company is dependent on external borrowings as well.
Given the rising need for data-center spaces, heightened competition from existing players and entry of new players in the space is unavoidable. Hence, fierce competition is expected to promote aggressive pricing in the space, thereby, dampening the company's margins and revenues. (Read more: Will Rising Rates Depress Equinix's Q3 Earnings? )
With a Zacks Rank of 4 and Earnings ESP of -1.24%, chances of any positive surprise are less in the third quarter.
The company witnessed a remarkable streak of reporting positive surprises with respect to funds from operations (FFO) per share, especially when looking at the previous four reports. In fact, Equinix surpassed the Zacks Consensus Estimate in each of the last four quarters, the average positive beat being 4.5%.
Equinix, Inc. Price and EPS Surprise
Equinix, Inc. Price and EPS Surprise | Equinix, Inc. Quote
Bethesda, MD-based lodging REIT Host Hotels has a solid portfolio of upscale hotels across potential markets which are likely to witness decent demand amid improving economy, sound corporate profits and improving job market.
Nonetheless, though supply growth has been tepid in the past, it has gathered momentum in recent times. In fact, supply growth is expected to remain elevated in 2018, as well as in 2019, particularly in markets where the company has exposure. This is expected to impact the company's pricing power. Also, dilutive impact of asset sales cannot be bypassed. Hike in interest rate adds to its woes. (Read more: Host Hotels to Report Q3 Earnings: What's in Store? )
With a Zacks Rank of 4 and Earnings ESP of 0.00%, chances of any positive surprise are less for Host Hotels in the third quarter.
The company has a decent surprise history. In fact, over the preceding four quarters, it posted positive surprises in three occasions, the average beat being 4.6%. This is depicted in the graph below:
Host Hotels & Resorts, Inc. Price and EPS Surprise
Host Hotels & Resorts, Inc. Price and EPS Surprise | Host Hotels & Resorts, Inc. 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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Equinix, Inc. (EQIX): Free Stock Analysis Report Apartment Investment and Management Company (AIV): Free Stock Analysis Report Host Hotels & Resorts, Inc. (HST): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research