4 REITs Primed For Earnings Beat Despite A Soft Start To Q1

We are about to enter the heart of the Q1 earnings season, with 100 plus S&P 500 constituents reporting this week and another 170 companies coming up with their earnings releases in the next. By now, it is clear that the softness in the overall market has been blown out of proportion on the results of Finance stocks.

The weakness indeed has been a dominant theme for the Finance sector, of which the real estate investment trusts (REITs) are a prominent part. The Banking industry, the pillar of Finance, may fail to show any improvement from the prior periods, but actual results managed to pull up surprises after estimates were considerably revised down over the last three months. 

While the banking industry continues to reel under the pressure of low interest rates with their net interest margins failing to expand, this is actually a blessing in disguise for the REITs. The ultra low rates not only keep the cost of their borrowing down but also make them prudent choices, especially for income-oriented investors, for very nature of paying steady dividend.  

The recent decline in jobless claims to their lowest level in over four decades, rises in the Consumer Price Index (CPI) and core CPI, and improved economic activity reported in the Fed’s Beige Book for most U.S. districts all point to a road to recovery. But the strength of the rebound has been thwarted by weakness in retail sales, business inventories and Producer Price Index (PPI).

The weakness, when combined with nagging global issues, gives enough reasons for investors to expect a more cautious Fed stance on rate hike when it meets later this month.
 
REIT Fundamentals
 
But it isn’t only the rate issue that investors should follow. A look at the fundamentals of REITs is also important as this sector has the chance to benefit from individual market dynamics. According to a recent study by the commercial real estate services’ firm CBRE Group Inc. (CBG), for the office market, despite the 10 basis points (bps) increase in national vacancy to 13.2%, the level is still the lowest since 2008. While new supply might still be the culprit, a better job market should ensure more demand for office space in the upcoming period.
 
Moreover, per the CBRE Group study, U.S. neighborhood, community and strip retail centers showed continued recovery in Q1 with a 10 bps sequential decline in average availability rate to 11.2%. Though lackluster retails sales in the first quarter are reasons to worry about, the absence of ample supply helped the retail market to address the slump.
 
Finally, the industrial market continued its longest stretch of recovery with the 24th straight quarter of declining availability, thanks to the E-commerce boom that led to a rise in demand for logistic facilities. However, while availability fell 20 bps sequentially to 9.2% in the first quarter and rents continued to climb, a whole lot of new construction coming to the market over the next two years can put a pause on growth next year.
 
To Gain is Most Important

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