We’re at the height of the Q3 earnings season, and it will not be an exaggeration to say that overall top line growth has been stressed. In fact, as of Friday, Oct 23, Q3 results from 172 S&P 500 members have revealed that total earnings are up only +2.0% on -2.1% lower revenues. (Read: Q3 Earnings Weak, Despite Tech Strength).
 
Though the broader Finance sector, of which the real estate investment trusts (REITs) are part, has reported a rise in earnings (thanks to cost cuts), the weakness in top line is palpable with modest growth in core loans and soft capital market activities amid low interest rates.
 
In fact, the recent bout of soft economic data, ranging from weaker job additions, decline in both ISM survey counts, dip in Consumer Price Index (CPI) and weak manufacturing activity, had already raised doubts about the economy meeting the Fed’s inflation rate target for a rate hike.
 
Now, the rate of growth in the U.S. economy seems well clipped with weak earnings flowing in from the corporate sector due to softness in commodity prices, a strong U.S. dollar and the uneasiness in the global economy that is hurting top-line performances.
 
REITs Back In Limelight
 
With all these pushing back the chances for a rate hike to at least early next year; the REITs have once again stolen the spotlight. They end up as big gainers in such an environment where their cost of debt, on which they are heavily dependent, is low. And above all, their dividend yield grabs investors’ attention more than yields on fixed income and money market accounts in times like this.
 
Therefore, with the majority of REITs still to report, the time is now to explore the industry fundamentals and the past-quarter performance to figure their chances of beating. Generally, an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation.
 
REIT Fundamentals Remains Stable
 
A look at the fundamentals of REITs confirms stability and strength. According to a recent study of the commercial real estate services’ firm CBRE Group Inc. (CBG), demand for U.S. commercial real estate was healthy in Q3, with rents moving up and vacancy level lingering at the lowest level.
 
Per the CBRE Group study, the vacancy rate in the office sector during Q3 declined 10 basis points (bps) sequentially to 13.4%. Solid demand for office space seems to have well outpaced new supply with the rate being flat or declining for 22 consecutive quarters.

Further, the Industrial market is on its lengthiest stretch of recovery with industrial availability rates also remaining flat or falling for 22 consecutive quarters. Last quarter saw a decline of 20 bps in industrial availability rates from the prior quarter to 9.6%.
 
Apart from these, the retail availability rate fell 10 bps sequentially and 30 bps from the comparable prior-year period to 11.3%. Cheap gasoline, low interest rates and an improving labor market keep up the expectations for growth in retail spending in the upcoming periods. And finally, apartment demand remained solid in Q3 with vacancy at 4.2%, depicting a decline of 20 bps from a year ago, and the lowest since Q1 2001.
 
How to Select the Best Stocks?
 
Selecting the best stocks might be a daunting task unless one knows the right method. This is because, though the above-mentioned REIT sub-sectors might have experienced continued strength, not all the stocks in these sectors are equally poised to benefit.
 
Therefore, to shortlist such stocks 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 4 REIT stocks that have the right combination of elements to deliver an earnings beat when they release their third-quarter results:
 
The Macerich Company (MAC - Analyst Report) carries a Zacks Rank #1 and has an Earnings ESP of +1.02%. The Zacks Consensus Estimate for the third quarter is pegged at 98 cents per share. The company delivered positive earnings surprises in three out of last four quarters, with an average beat of 2.54%. Moreover, the company recently declared a 4.4% hike in its quarterly dividend rate.
 
Macerich is a self-administered, self-managed REIT which is engaged in the acquisition, ownership, redevelopment, management and leasing of regional shopping centers located throughout the United States.
 
- Macerich is scheduled to report third-quarter results after the market closes on Oct 27.
 
Mid-America Apartment Communities Inc. (MAA - Snapshot Report) has a Zacks Rank #1 and an Earnings ESP of +0.75%. The Zacks Consensus Estimate for the quarter is $1.33 per share. The company delivered positive earnings surprises in all the last four quarters, with an average beat of 3.95%.
 
Mid America Apartment Communities Inc. is a REIT which owns and operates apartments. The company also manages but does not own properties containing apartment units. The company seeks to acquire and develop apartment communities appealing to middle and upper income residents.
 
- Mid America Apartment Communities is slated to report third-quarter results after the market closes on Oct 28.
 
CubeSmart (CUBE - Snapshot Report) has a Zacks Rank #2 and an Earnings ESP of +3.13%. The Zacks Consensus Estimate for the third quarter is pegged at 32 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 4.50%.
 
CubeSmart is a self-administered and self-managed real estate company focused on the ownership, operation, acquisition and development of self storage facilities in the United States. Its self storage facilities are designed to offer storage space for residential and commercial customers. CubeSmart, formally known as U-Store-It Trust, is based in Wayne, Pennsylvania. 
 
- CubeSmart is slated to release third-quarter results after market close on Nov 5.
 
W. P. Carey Inc. (WPC - Snapshot Report) has a Zacks Rank #1 and an Earnings ESP of +0.98%. The Zacks Consensus Estimate for the third quarter is pegged at $1.02 per share. The company delivered positive earnings surprises in two out of last four quarters, with an average beat of 11.81%.
 
W. P. Carey Inc. is a REIT engaged in providing long-term sale-leaseback and build-to-suit financing for companies. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. W. P. Carey Inc., formerly known as W. P. Carey & Co. LLC, is based in New York.
 
- W. P. Careyis slated to release third-quarter results prior to the market open on Nov 3.