Advertisement

3 REIT Earnings Bets amid Treasury Yield Plunge

3 REIT Earnings Bets amid Treasury Yield Plunge

The weak performance by the real estate investment trust (:REIT) industry in September may have deterred your investment plans. But thanks to the recent and unexpected plunge in benchmark treasury yields, a renewed investor enthusiasm on this industry is palpable.

Defying consensus expectations of the 3% level, the 10-year treasury yields have been moving south, ending at 2.20% on Oct 20. Amid this environment, issues surrounding the hike in the Fed interest rate have taken a backseat, as investors are busy speculating the bottom level of treasury yields.

Adding fuel to fire, St. Louis Federal Reserve president James Bullard recently commented that the bond repurchase plan may continue till December, instead of its closing this month. Furthermore, the growing optimism that Fed may not be in a hurry to raise rates right after the closure of tapering is helping REIT investors build their hopes.

In fact, the low interest rate environment, though not perpetual, is expected to result in higher consumption spending. Consequently, the majority of asset types owned and managed by the REITs are expected to benefit.

On the other hand, while the disappointing sales number makes us a bit uncomfortable about the retail REITs performance in the near term, the low initial jobless claims figure has raised our hopes for the office REITs. An increased workforce needs more space for accommodation. Amid lower construction activity, therefore, companies are renting more square feet, leading to a reduction in the vacancy level for office REITs.

Furthermore, with underproduction in overall housing, residential REITs are expected to gain pace from the improvement in the economy and labor market plus favorable demographic trends. Finally, in the low rate environment, the wide interest spread would favor the mortgage REITs which usually invest in mortgages and mortgage-backed securities and use equity and debt for financing purchases to make money from the spread.

How to Pick Stocks?

But not all the companies in this space offer equal prospects. That said, with earnings releases underway, it might be a good idea to pick a few REITs that are poised to beat earnings. Essentially, an earnings beat will rebuild investors' confidence in these stocks, leading to a quick appreciation in price. Along with the solid dividend income that these REITs offer, investing in these stocks guarantees encouraging returns.

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. And coupled with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – these stocks have a high chance of a positive earnings surprise.

American Capital Agency Corp. (AGNC) has a Zacks Rank #1 and an earnings ESP of +5.20%. The Zacks Consensus Estimate for the third quarter for this mortgage REIT is pegged at 77 cents per share. It has exceeded estimates in three of the last four quarters and has an average earnings surprise of 6.88%.

Bethesda, MD-based American Capital Agency’s past performance have benefited from its strategic decisions, including maintenance of leverage level, operating with a larger duration gap and reduction in the size of its swaption portfolio. Going forward, we believe that the concerted measures to reposition its portfolio so as to meet the current interest rate environment augur well for this company’s profitability.

- American Capital Agency is expected to announce its third-quarter results after market close on Oct 27, 2014.

AvalonBay Communities Inc. (AVB) is a Zacks Rank #3 stock with an earnings ESP of +8.46%. The Zacks Consensus Estimate for the third quarter is $2.01 per share. The residential REIT delivered a positive earnings surprise in two of the last four quarters with an average beat of 3.09 %. The stock also has a long-term expected growth rate of 10.80%.

This Maryland corporation posted encouraging results in the prior quarter on improved performance of its newly developed and acquired communities like the Archstone. The West Coast, in particular, is witnessing improved fundamentals and healthier growth and given its solid operating platform, we remain optimistic about the company’s growth prospects.

AvalonBay is scheduled to announce its third-quarter results after market close on Oct 27, 2014.

Hudson Pacific Properties, Inc. (HPP) carries a Zacks Rank #2 and has an earnings ESP of + 6.90%. The Zacks Consensus Estimate for the third quarter is 29 cents per share. The company has been a steady performer and recorded an average earnings surprise of 10.08% over the last four quarters. The stock also has a long-term expected growth rate of 9.70%.

Los Angeles, CA based Hudson Pacific, which deals in office and entertainment properties, generally eyes high barrier-to-entry, in-fill locations with favorable, long-term supply-demand trends in select key markets like Los Angeles, Orange County, San Diego, San Francisco and Seattle. Going forward, improving market fundamentals and favorable lease economics are expected to drive its performance.

- Hudson Pacific is scheduled to announce its third-quarter results after market close on Nov 3, 2014.

Bottom Line

Rates will eventually have to move north in tune with the progress in the U.S. economy. But despite being a headwind for REITs, we strongly believe that the higher financing cost that increased interest rates will result in, will be dwarfed by the associated economic opportunity, giving investors a solid chance to grab good returns.

Read the analyst report on AGNC

Read the analyst report on AVB

Read the analyst report on HPP


Zacks Investment Research