The fourth-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.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
This is likely to be reflected in the earnings releases of Kimco Realty Corporation KIM, American Homes 4 Rent AMH and Vornado Realty Trust VNO.
With the Federal Reserve officials keeping the rate steady this time following the FOMC meeting and indicating a more cautious outlook moving forward, investors have been jittery about their investments in the rate-sensitive REITs. This is because REITs are usually preferred in a falling-rate environment because of their debt-dependence nature. Also, REITs are often viewed as bond substitutes due to their consistent and high dividend payouts. So, a rate cut drives investors’ sentiment toward these stocks, while a rising rate environment makes investors worried.
However, despite the rate environment not appearing favorable in the near term, focusing on REITs will be a smart move 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 any challenging environment. Let’s check the industry fundamentals to find sectors showing strengths.
Industry Fundamentals
For example, for REITs dealing with residential real estate, we note that, per RealPage data, the U.S. apartment demand surged to its highest level in almost three years in the fourth quarter of 2024, comfortably surpassing the record-high new supply seen that year. Between October and December 2024, the U.S. apartment market absorbed 230,819 market-rate units, while 155,408 new units were delivered during the same period. Annual supply hit 588,883 units, while demand led to 666,699 units. As demand exceeded supply, U.S. apartment occupancy saw a notable annual increase, reaching 94.8% in December. The annual occupancy change was 0.7%.
In the case of retail real estate, we note that per a report from CBRE Group CBRE, the U.S. overall retail availability rate remained at 4.7% in the fourth quarter, even though there were many store closures and there was a decline in net absorption. This stability in retail market fundamentals was supported by limited new development amid high construction costs. Amid strong competition for limited space and solid demand for top-tier locations, asking rent growth remained healthy in the fourth quarter, with the average asking rent increasing 0.4% quarter over quarter and 2.5% year over year to $23.80 per square foot.
Meanwhile, according to another CBRE report, the demand for high-quality office space drove office market gains in the fourth quarter. With net absorption surpassing construction completions for a second consecutive quarter, the overall vacancy rate fell by 10 basis points (bps) to 18.9%. Particularly, demand for premium space in prime locations remained robust, whereas commodity buildings saw limited tenant interest. The vacancy rate for prime offices declined by 10 bps sequentially to 15.3%, while non-prime vacancy held steady at 19.2%.
Leasing activity reached 62 million square feet in the fourth quarter, marking a 24% increase sequentially and a 23% rise year over year. Renewals remained at historically high levels, driven primarily by larger occupiers. Net absorption reached 10.3 million square feet, the highest quarterly total in three years. The average asking rent increased by 23 cents year over year to $36.31 per square foot, while the average taking rent climbed 15 cents to $32.29.
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), 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 three REITs that have the right combination of elements to deliver positive surprises this season.
Kimco Realty Corporation currently carries a Zacks Rank of 3 and has an Earnings ESP of + 2.11% for the quarter under review. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions and met on the other, the average beat being 2.50%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Kimco is likely to have gained from the solid demand for its portfolio of premium shopping centers, which are predominantly grocery-anchored and are in the drivable first-ring suburbs of its top major metropolitan Sunbelt and coastal markets, having several growth levers like high employment and strong spending power. A diversified tenant base is anticipated to have aided stable revenue generation for the company during the to-be-reported quarter, driving its top line.
Kimco Realty is scheduled to release fourth-quarter earnings on Feb. 7, before market open.
The Zacks Consensus Estimate of $516.67 billion for quarterly revenues suggests a 14.41% increase year over year. The consensus estimate for the quarterly funds from operations (FFO) per share is pegged at 42 cents, which indicates 7.7% year-over-year growth.
American Homes 4 Rent holds a Zacks Rank #3 and an Earnings ESP of +1.84 % at present. Over the trailing four quarters, AMH surpassed estimates on three occasions and met on the other, the average surprise being 2.34%. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Homes 4 Rent Price and EPS Surprise
American Homes 4 Rent Price and EPS Surprise
American Homes 4 Rent price-eps-surprise | American Homes 4 Rent Quote
AMH, focused on owning, operating and developing single-family rental homes, is expected to have benefited from the favorable fundamentals in the residential real estate market. The REIT’s Q4 earnings are expected to have benefited from the favorable supply landscape and sustainable demand tailwinds amid the national housing shortage, growing single-family residence renter cohort and the high cost of home ownership in its top markets.
American Homes 4 Rent is scheduled to report its quarterly figures on Feb. 20, after market close.
The Zacks Consensus Estimate for quarterly revenues stands at $432.74 million, which calls for a 5.9% year-over-year increase. The consensus mark for the fourth-quarter FFO per share of 45 cents marks a 4.65% increase year over year.
Vornado Realty Trust carries a Zacks Rank of 3 and has an Earnings ESP of +0.93% for the to-be-reported quarter at present. Over the trailing four quarters, this office REIT surpassed the Zacks Consensus Estimate on three occasions and missed on the other, the average beat being 1.80%.
Vornado owns a portfolio of top-quality office properties in a few select high-rent, high-barrier-to-entry markets of New York, Chicago and San Francisco. Although demand for overall office spaces in several markets is likely to remain subdued in the near term, tenants’ healthy demand for premier office spaces with class-apart amenities and Vornado’s ability to offer such spaces is expected to have driven healthy leasing activity in the fourth quarter. Its portfolio-repositioning efforts and healthy balance sheet position also augur well.
Vornado is slated to release earnings results on Feb. 10, after market close.
Currently, the Zacks Consensus Estimate for the company’s quarterly revenues stands at nearly $447.40 million, suggesting a 1.25% increase year over year. The Zacks Consensus Estimate for the quarterly FFO per share is currently pegged at 51 cents.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
