The first-quarter reporting cycle is underway, and investors can be lured by the profits of companies that have already released their quarterly figures. However, rather than adding the stock later to your portfolio, accumulating the ones poised to beat estimates can generate higher gains. This is because an earnings beat usually serves as a catalyst, raising investors’ confidence in the stock and resulting in price appreciation. This is likely to be reflected in the earnings releases of Armada Hoffler Properties, Inc. AHH and Granite Real Estate Investment Trust (GRP.U).
Moreover, rather than fretting too much about inflation and rate hikes, focusing on REITs will be a smart move. This is because with the industry offering the real estate structure for several economic activities, be it real or virtual, there are pockets of strength even in a challenging environment.
For example, for REITs dealing with residential real estate, we note that according to first-quarter data from RealPage Market Analytics, the U.S. apartment market witnessed a recovery in net apartment demand, ending a streak of three consecutive quarters of negative absorption. The market added 19,243 net new renters in the quarter, signaling a return to positive territory.
Occupancy rates continued to slide but at a much lesser degree than before, coming in at 94.7% in March, matching the pre-pandemic decade average. Similarly, in March, same-store effective asking rents for new lease signers increased 0.3%, with effective asking rents up 3.9% year over year, marking the first time below 4% since April 2021.
As far as retail real estate is concerned, it should be noted that per a report from CBRE Group CBRE, the U.S. retail real estate market remained resilient in the first quarter of 2023, with the retail availability rate falling 50 basis points (bps) year over year to a new low of 4.8%.
The overall retail rent growth of 2% year over year remained above the 10-year average. Retail space absorption was at 8.6 million square feet for the first quarter of 2023, marking the 10th consecutive quarter of positive retail absorption per the CBRE Group report.
Moreover, per a Cushman & Wakefield CWK report, in the first quarter, industrial demand moved back to “normalized levels”, but it “still powers forward”. Amid high inflation and high-interest rates, slowing consumer demand and uncertainty in the economy, U.S. leasing totals witnessed a 9.4% decline from the prior quarter, with 136.9 million square feet (msf) of deals being signed in the first quarter. However, this total was in sync with the quarterly average achieved pre-pandemic.
There has been an uptick in the overall U.S. industrial vacancy rate, which moved higher by 40 bps in the first quarter to 3.6%. However, the vacancy is still lower than the 10-year historical average of 5.3%. Also, there has been a flight to quality by logistic tenants, with tenants executing 59.1 msf of deals in industrial facilities built since 2020 during the quarter, marking 46.4% of the total. Asking rental rate growth remained high during the quarter. The same increased 3.5% sequentially, reaching another new high of $9.19 per square foot (psf) and surpassing the $9.00-psf mark for the first time, according to the Cushman & Wakefield report.
Meanwhile, per a Cushman & Wakefield report, the U.S. office market demand continues to suffer as office-using employment growth has simmered down amid inflationary pressures, increased interest rates, tight labor markets and economic uncertainty. However, flight-to-quality trends have continued, with 25 U.S. markets reporting positive demand among Class A office buildings.
The Zacks Methodology
Picking the right stock could be difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, combining a 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. Research shows that for stocks with this combination of the Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.
Here are two REITs that have the right combination of elements to deliver positive surprises this season. Also, diversification benefits offered by real estate make these prudent investment choices now.
Armada Hoffler Properties currently carries a Zacks Rank of 2 and has an Earnings ESP of + 3.33% for the quarter under review. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on two occasions and met the same in the remaining two periods, the average beat being 3.21%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Armada Hoffler Properties, Inc. Price and EPS Surprise
Armada Hoffler Properties, Inc. price-eps-surprise | Armada Hoffler Properties, Inc. Quote
Armada Hoffler Properties is engaged in developing, building, acquiring and managing high-quality, institutional-grade office, retail and multifamily properties located mainly in the Mid-Atlantic and Southeastern United States. Apart from developing and building properties for its account, AHH offers development and general contracting construction services to third-party clients.
In the first quarter, Armada Hoffler Properties is expected to have benefited from its diversified portfolio. The Zacks Consensus Estimate of $56.39 million for quarterly revenues suggests a 3.20% increase year over year. The consensus estimate for quarterly funds from operations (FFO) per share of 30 cents calls for a 7.14% year-over-year rise.
Armada Hoffler Properties is scheduled to announce first-quarter figures on May 9 before market open.
Granite Real Estate Investment Trust carries a Zacks Rank of 3 and has an Earnings ESP of +1.12% for the to-be-reported quarter at present. In the last four quarters, the REIT surpassed the Zacks Consensus Estimate on three occasions and met the same on the other, the average beat being 1.19%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Granite Real Estate Inc. Price and EPS Surprise
Granite Real Estate Inc. price-eps-surprise | Granite Real Estate Inc. Quote
A Canadian-based REIT — Granite — is engaged in the acquisition, development, ownership and management of logistics, warehouse and industrial properties in North America and Europe.
In the first quarter, Granite, with its high-quality portfolio, is likely to have gained from the still healthy deal volume, low vacancy levels and rent growth in the industrial real estate market. The Zacks Consensus Estimate for first-quarter FFO per share has remained unrevised at 89 cents over the past month. However, it implies 7.23% year-over-year growth.
Granite is set to release earnings results on May 10 after market close.
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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