The Q2 earnings season is in full gear and drum beats of success can be heard across the broader Finance sector, of which the real estate investment trusts (REITs) are part. Banking behemoths came up with better-than-expected results, thanks to lesser litigation charges and cost control amid moderate improvement in core business.
 
However, since the majority of REITs are yet to report, the time is right to size up the industry fundamentals and the past-quarter performance to figure their chances of beating. This is important because usually an earnings beat raises investors’ confidence in a stock, leading to rapid price appreciation and ensuring more gains from one’s investments.


Its common knowledge that REIT stock prices have been subject to volatility in the recent past, thanks to the speculations tied to the rate hike and treasury yield moves. But the fundamentals, on the other hand, reveal stability and continued strength.
 
REIT Fundamentals Remains Stable
 
And why not? After all, despite global issues, the domestic economy has steadily been gaining ground. The labor market is showing strength and consumer confidence is upbeat. The spending level of consumers is picking up amid better job prospects and higher business momentum while housing recovery and cheaper fuel are boosting their purchasing power. And all these are leading to renewed optimism in the market.
 
With real estate catering to all basic essentials and even luxuries, the REIT sector too is well leveraging on this recovery as higher economic activity translates into more occupancy for assets and scope for growth in rents. This is quite evident from the recent study of the commercial real estate services firm CBRE Group Inc. (CBG) that reveals solid momentum across all property types.
 
The Study
 
Per the CBRE Group study, the vacancy rate in the office sector declined 40 basis points (bps) to 13.5% during Q2 of 2015, nearing the lowest point since the Q3 of 2008 level of 13.2%. With anticipations of better growth in this second half of 2015, hiring is expected to gather pace, leading to a sustained recovery of the office market fundamentals.
 
Further, the Industrial market is on its lengthiest stretch of recovery with industrial availability rates remaining flat or falling for 21 consecutive quarters. Last quarter saw a decline of 30 bps in industrial availability rates from the prior quarter to 9.8%, in line with the cyclical low seen in Q4 of 2007. Increase in consumer spending and e-commerce growth as well as the revival of the manufacturing sector amid low energy prices is not only helping in the buoyancy of the domestic economy but is also fueling the sector’s growth.
 
And with the economy looking upbeat, apartments are in demand, with Q2 multifamily housing vacancy rate falling 30 bps year over year to 4.3%. The retail sector was not far behind with a 10 bps drop in availability rate from Q1 of 2015 to 11.4%. Essentially, a fat wallet courtesy of economic recovery translates into higher retail goods sales.
 
How to Select Favorable Stocks?
 
The above-mentioned REIT sub-sectors may have experienced continued strength, but not all the stocks in these sectors are equally poised to benefit. Hence, choosing the right stocks could be quite difficult unless one knows the right method.
 
One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for the stocks with this combination, chances of a positive earnings surprise are as high as 70%.
 
Here are 3 REIT stocks that have the right combination of elements to deliver an earnings beat when they release their second-quarter results:
 
Ashford Hospitality Trust, Inc. (AHT) carries a Zacks Rank #1 and has an Earnings ESP of +4.76%. The Zacks Consensus Estimate for the second quarter is pegged at 42 cents per share. The company delivered positive earnings surprises in all the last four quarters, with an average beat of 18.45%.
 
Dallas, TX-based Ashford Hospitality Trust is a lodging REIT that is engaged in opportunistic investments in upper upscale, full-service hotels. Its dividend yield is 5.47%.
 
- Ashford Hospitality Trust is scheduled to report second-quarter results after the market closes on Aug 6.
 
Boston Properties Inc. (BXP) has a Zacks Rank #2 and an Earnings ESP of + 1.49%. The Zacks Consensus Estimate for the quarter is $1.34 per share. The company delivered positive earnings surprises in three out of last four quarters, with an average beat of 3.23%.
 
Massachusetts-based Boston Properties Inc. is a REIT that primarily owns and develops Class A office real estates in the U.S.  The company’s properties are concentrated in four core markets: Boston, New York, San Francisco and Washington, DC.
 
- Boston Properties is slated to report second-quarter results after the market closes on Jul 29.
 
Hersha Hospitality Trust (HT) has a Zacks Rank #1 and an Earnings ESP of +4.29%. The Zacks Consensus Estimate for the second quarter is pegged at 70 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 15.41 %.
 
This Maryland REIT in the hospitality sector owns and operates high quality upscale hotels in urban gateway markets including New York, Washington DC, Boston, Philadelphia, South Florida and select markets on the West Coast. 
 
- Hersha Hospitality is slated to release second-quarter results after market close on Jul 28.

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