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3 REITs Likely to Turn Out Winners This Earnings Season - Earnings ESP

The year 2015 has so far been volatile for the U.S. stock market. If highs are encouraging shareholders, record lows are making them nervous as well. Issues surrounding global growth, geopolitical developments and oil prices have taken center stage and the platform has further been shaken up by the Fed's moves on interest rates, outlook cut and the strengthening dollar.

But such an environment has also put a downward pressure on the 10-year Treasury notes bringing the spotlight on the real estate investment trust (REIT) stocks. This is because REITs are often treated as bonds given their high dividend paying nature. Treasury yields naturally end up playing a significant role in their price movement.

No Respite from Market Volatility

Further, there seems no respite from volatility, at least in the short term, given the dismal data released last week with reports on housing, jobless claims, retail sales and CPI all failing to encourage us. Echoing similar sentiments, the fear gauge of the market - the CBOE Volatility Index (VIX) - too has been fluctuating.

REIT Numbers Make Us Feel Comfortable

But the REIT numbers make us feel comfortable. This is because in March, the FTSE NAREIT All REITs Index delivered a total return of 1.15% against a 1.58% decline in the S&P 500 Index. Even for first-quarter 2015, the FTSE NAREIT All REITs Index gained 4.05% with a dividend yield of 3.80%, outperforming the S&P 500 Index that generated a total return of 0.95% and a dividend yield of 2.02% over the same time frame.

Study Reveals Continued Strength in Commercial Real Estate Market

Moreover, the study by CBRE Group Inc. ( CBG ) reveals continued strength in the commercial real estate market. It shows that in the first quarter, the office vacancy rate decreased by 10 basis points (bps) sequentially to 13.9%, reaching the lowest mark since 2008 while recovery in the industrial market continued with national industrial availability declining 20 bps sequentially to 10.1%. Demand for the nation's apartment buildings stayed solid with 4.5% vacancy in the first quarter and a stable 11.5% availability in the retail sector, similar to the prior-quarter level.

How to Select Favorable Stocks?

As an investor, beating this market volatility would be a daunting task. With the earnings season hitting the floor, an apt strategy would not only be choose income investing (it offers hedging against uncertainty), but also look for stocks with a higher probability of beating earnings estimates. This is because usually an earnings beat raises investors' confidence in a stock, leading to rapid price appreciation and ensuring more gains from one's investment.

Yet, choosing the right stocks could be quite difficult unless one knows the right method. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%.

Here are 3 REIT stocks that have the right combination of elements to deliver an earnings beat when they release their first-quarter results:

Armada Hoffler Properties, Inc. ( AHH ) carries a Zacks Rank #2 and has an Earnings ESP of +5.88%. The Zacks Consensus Estimate for the first quarter is pegged at 17 cents per share. The company has delivered positive earnings surprises in three out the last four quarters, with an average beat of 6.53%.

Armada Hoffler Properties is engaged in developing, building, owning and managing office, retail and multifamily properties primarily in the United States. Its dividend yield is 6.59%.

- Armada Hoffler Properties is scheduled to report first-quarter results before the opening bell on Apr 30.

ChesapeakeLodging Trust ( CHSP ) has a Zacks Rank #2 and an Earnings ESP of +4.17%. The Zacks Consensus Estimate for the quarter is 24 cents per share. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 4.87%.

This lodging REIT focuses on investments in upscale hotels in business and convention markets, and select-service hotels in urban settings in the U.S. The company has a dividend yield of 4.38%.

- Chesapeake Lodging Trust is slated to report first-quarter results after the market closes on Apr 30.

Kilroy Realty Corp. ( KRC ) has a Zacks Rank #2 and an Earnings ESP of +3.23%. The Zacks Consensus Estimate for the first quarter is pegged at 93 cents per share. The company has a decent track with respect to earnings. It delivered positive earnings surprises in each of the last four quarters, with an average beat of 4.30%.

This REIT owns, operates and develops commercial and industrial properties and serves a diversified roster of industries, including technology, telecommunications, engineering, entertainment, healthcare, biotechnology, and professional services. The stock offers a dividend yield of 1.89%.

-Kilroy Realty is slated to release its first-quarter results after the market closes on Apr 29.

Bottom Line

Despite short-term hiccups, the domestic economy is likely to bounce back in the latter half of the year and the Fed is only expected to hike rates when the economy gathers sufficient steam. And as long as economic improvement takes place, REIT investors have hardly anything to worry about. This is because an upbeat economy is characterized by more economic activity, leading to higher demand for space. With supply remaining manageable, the resultant higher rents and occupancies would cumulate into higher gains for the real estate landlords.

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CHESAPEAKE LODG (CHSP): Free Stock Analysis Report

KILROY REALTY (KRC): Free Stock Analysis Report

CBRE GROUP INC (CBG): Free Stock Analysis Report

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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 Nasdaq, Inc.


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

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