REITs to Watch for Earnings on Jan 31: AVB, SPG, MAA & DRE

We are in the heart of the Q4 reporting cycle and the real estate investment trust (REIT) space is buzzing with activity. In fact, there are a number of Q4 earnings releases queued for this week, of which AvalonBay Communities, Inc. AVB, Simon Property Group, Inc. SPG, Mid-America Apartment Communities, Inc. MAA and Duke Realty Corporation DRE will release quarterly numbers on Jan 31.

No doubt, the December rate hike and possibilities of further increases in rates this year have kept investors in the REIT space worried to some extent. However, with underlying asset categories and the location of properties playing a crucial role in determining the performance of REITs, not all players in the space have equal chances to excel or fall behind.

Going by numbers, per a study by the commercial real estate services’ firm — CBRE Group Inc. CBG — the overall U.S. office vacancy rate expanded 10 basis points (bps) to 13.0% during fourth-quarter 2017 amid an uptick in supply. Nevertheless, the national office vacancy rate still hovers near its post-recession low and vacancy continues to drop in majority of the U.S. office markets. Moreover, solid demand, recovering economy and job market, strengthening e-commerce market and healthy manufacturing environment are helping the industrial asset category to grab attention.

Further, per a study by the real estate technology and analytics firm — RealPage, Inc. RP — the U.S. apartment market reported moderate rent growth for the calendar year 2017 and seasonal pricing cuts in the fourth quarter. While U.S. apartment rents increased at a modest rate of 2.5% in 2017, effective rents for new leases edged down 0.9% during the quarter. However, national apartment occupancy came in at 95.1% at the end of the quarter, remaining stable year over year.

Finally, mall traffic has been severely affected and retail landlords have consequently felt the heat due to consumers’ preferences inclining more and more toward online retail. However, retail REITs are putting in every effort to boost productivity of malls, by trying to grab attention from new and productive tenants, and disposing the non-productive ones. Retail REITs have been avoiding heavy dependence on apparel and accessories, but expanding dining options, opening movie theaters and offering recreational facilities to boost traffic. However, the upfront costs associated with such efforts are likely to limit near term margin improvement.

Per our latest Earnings Preview, overall earnings for the Finance sector, of which REITs are part, are expected to be up 8.4% year over year on 2.4% higher revenues. This represents the Q4 earnings and revenue expectations for the sector as a whole — i.e. after combining the reported actual results with the still-to-come estimates.

Therefore, surprises might be in store for some REITs, while others might disappoint this earnings season. So let’s have a close look at the factors that will impact the above-mentioned REITs’ fourth-quarter results.

Residential REIT — AvalonBay Communities — is well poised to grow on the back of rising demand from household formation and favorable demographics. Also, increasing consumer confidence backed by job growth, higher wages and a healthier balance sheet promise bright prospects for this Arlington, VA-based REIT.

In fact, the company is also likely to continue experiencing high occupancy. Although the pace of rental growth has slowed down from the prior years, it is now likely to achieve stability. The Zacks Consensus Estimate for fourth-quarter revenues is currently pegged at $555.2 million, denoting an expected increase of 7.1% year over year. Further, the Zacks Consensus Estimate for funds from operations (FFO) per share in the soon-to-be-reported quarter is pegged at $2.24, indicating a 5.7% increase year over year.

However, the fourth quarter is seasonally sluggish. Moreover, there is presence of elevated supply in quite a few of the company’s markets. In addition, there is high concession activity amid elevated supply, which remains a concern. (Read more: AvalonBay to Post Q4 Earnings: What's in the Offing?)

AvalonBay has a Zacks Rank # 3 (Hold) and Earnings ESP of -0.07%. Though the Zacks Rank is favorable, the negative ESP lowers chances of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Notably, in the preceding four quarters, the company surpassed estimates on one occasion and missed in the other three, as shown in the chart below:

Indianapolis, IN-based retail real estate investment trust (REIT) — Simon Property Group — has been undertaking various initiatives, of late, to strengthen its relationship with customers. In addition, it is focusing on omni-channel strategies to gain popularity among retailers. Further, in the fourth quarter, the company initiated various programs and events to steer mall traffic.

Nevertheless, with more and more consumers shifting to online purchases, mall traffic continues to remain considerably depressed. This has resulted in an increasing number of retailers joining the dot-com bandwagon. Also, retailers are reconsidering their footprint and opting for store closures. While Simon Property is making efforts to beat these retail blues through various initiatives, implementation of such measures requires a decent upfront cost. Consequently, this might impede any robust growth in the company’s profit margins in the quarter under review.

Amid these, the Zacks Consensus Estimate for the fourth-quarter 2017 revenues is currently pegged at $1.4 billion — indicating projected growth of around 0.5% year over year. Moreover, The Zacks Consensus Estimate for fourth-quarter FFO per share is currently pegged at $3.12. (Read more: Will E-Retail Boom Mar Simon Property's Q4 Earnings?)

Currently, the Earnings ESP for Simon Property is -0.10%. Also, its Zacks Rank #4 (Sell) further decreases the predictive power of ESP.

Nonetheless, over the last four quarters, the company exceeded the Zacks Consensus Estimate in three occasions and missed in the other. This is depicted in the graph below:

You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Memphis, TN-based residential REIT Mid-America Apartment Communities — commonly known as MAA — maintains a well-balanced portfolio in the Southeast and Southwest regions of the United States. Further, favorable demographics and strong job growth in target markets are anticipated to drive demand for MAA’s properties. The Zacks Consensus Estimate for fourth-quarter total revenues is currently pegged at $386.3 million, denoting projected growth of 25.8% year over year.

However, it should be noted that the fourth quarter is seasonally sluggish. In addition, supply of new units increased in a number of markets, including Dallas and Austin. Hence, any robust growth in its same-store portfolio is likely to remain restricted in the quarter to be reported. Also, high concession activity amid higher supply adds to its woes.

As such, the Zacks Consensus Estimate for FFO per share for the quarter is pegged at $1.48, projecting a 1.3% decrease year over year. (Read more: What to Expect From Mid-America Apartment Q4 Earnings?)

Mid-America Apartment Communities carries a Zacks Rank of 3. Despite this favorable rank, the Earnings ESP of -2.31% lowers chances of an earnings beat.

However, the company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, which is depicted in the graph below:

In recent years, Indianapolis, IN-based Duke Realty has made concerted efforts to enhance its industrial portfolio. This augurs well because the industrial-asset category has been grabbing attention as it is experiencing high demand, with the economy and job market displaying signs of recovery and the manufacturing environment remaining healthy.

Moreover, to simplify the company’s business model and turn it into a leading domestic pure play industrial REIT, Duke Realty has made rigorous efforts to lower its suburban office assets. Subsequently, in May 2017, the company inked a deal to sell its medical office buildings (MOB) portfolio for a price of $2.8 billion.

While such streamlining measures are a strategic fit for the long term, the near-term dilutive effect cannot be bypassed. In fact, such short-term impact will likely drag the company’s quarterly results. Further, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $175 million, indicating a decline of 14.3% year over year. Also, the Zacks Consensus Estimate for the fourth-quarter FFO per share of 30 cents denote a projected descend of 3.2% from a year ago. (Read more: Why an Earnings Beat Is Unlikely for Duke Realty in Q4)

Currently, the Earnings ESP for Duke Realty is 0.00%. Also, its Zacks Rank of 4 makes surprise prediction difficult.

Nevertheless, the company exceeded the Zacks Consensus Estimate in each of the preceding four quarters. The graph below depicts this surprise history:

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.

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