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

Clearly, there is stability in the real estate market but the lack of any catalyst for robust improvement is being widely felt. Yet, that does not mean that there is no scope to gain at all. Even a weak market is a treasure trove if investors are capable enough to find the hidden gems.

Since earnings beat is a good way of finding profitable stocks, it appears a pretty good idea to focus on those REIT stocks that are yet to report in this earnings season. Generally, an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation.

 
How to Select the Best Stocks?
 
Selecting the best stocks from a long lineup might be a daunting task unless one knows the right method. This is because, not every stock is equally poised to benefit. To make the task simple we rely on the Zacks methodology, combining a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
 
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. And research shows that for the stocks with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70%.
 
Here are four REIT stocks that have the right combination of elements to deliver an earnings beat when they release their first-quarter results:
 
Silver Bay Realty Trust Corp. (SBY - Snapshot Report) has a Zacks Rank #1 and an Earnings ESP of +5.00%. The Zacks Consensus Estimate for the quarter is 20 cents per share. Over the past four quarters, the company delivered average positive earnings surprises of 7.07%.
 
Silver Bay Realty Trust Corp. is a real estate investment trust focused on the acquisition, renovation, leasing and management of single-family properties. The company is based in United States.
 
- Silver Bay is expected to report first-quarter results on May 4.
 
SL Green Realty Corp. (SLG - Analyst Report) has a Zacks Rank #2 and an Earnings ESP of +1.82%. The Zacks Consensus Estimate is pegged at $1.65 per share. The company delivered positive earnings surprises in all the last four quarters, with an average beat of 4.33%.
 
New York-based SL Green mainly acquires, manages, develops and leases commercial office properties in the New York Metropolitan area, especially midtown Manhattan. Of late, SL Green has been seeking opportunities in New York City’s premium retail locations with its retail investments complementing its core office and structured finance businesses.
 
- SL Green is slated to release first quarter results after the market closes on Apr 20.
 
Essex Property Trust Inc. (ESS - Analyst Report) carries a Zacks Rank #2 and has an Earnings ESP of +1.14%. The Zacks Consensus Estimate is pegged at $2.63 per share. The company delivered positive earnings surprises in each of the last four quarters, with an average beat of 2.62%.
 
Headquartered in San Mateo, CA, Essex Property Trust is a residential REIT engaged in the acquisition, development, redevelopment and management of multifamily residential properties in supply constrained markets. Specifically, the company enjoys concentration of assets in select coastal submarkets along the West Coast.
 
- Essex Property Trust is slated to report first-quarter results after the market closes on Apr 28.
 
Vornado Realty Trust (VNO - Analyst Report) carries a Zacks Rank #3 and has an Earnings ESP of +4.03%. The Zacks Consensus Estimate is pegged at $1.24 per share. Over the past four quarters, the company delivered average positive earnings surprises of 10.4%.
 
Vornado Realty Trust is a fully integrated real estate investment trust. The company owns, directly or indirectly, the following: Office Building Properties; Retail Properties; Merchandise Mart Properties; Temperature Controlled Logistics; and Other Real Estate Investments. It is one of the largest property owners in New York City.
 
- Vornado is scheduled to report first-quarter results after the market closes on May 2.