REITs Are Bucking The Trend This Earnings Season

| October 11, 2011

Earnings season gets underway today.  As usual, Alcoa (AA) will kick things off when they release their third quarter results after the markets close.

Here’s the thing…

Earnings forecasts are as clear as mud right now.  There’s just no way to know what to expect when companies report.

Consider this…

Analysts at S&P Equity Research Services are looking for Alcoa to report earnings per share of $0.31.  Yet, analysts at Capital IQ (another S&P company) estimate AA will earn $0.22 per share.

Which is it?  Will Alcoa earn 31 cents or 22 cents per share?

Your guess is as good as mine!?!

There are just too many moving parts.  It’s impossible to have any conviction about how earnings will turn out this quarter.

I won’t be surprised to see some companies beat estimates with flying colors.  But at the same time, we could see other companies fall flat on their face.  I don’t think anything is outside the realm of possibilities at this point.

One thing’s for sure – it’s tough to invest when there is so much uncertainty!

Fortunately, REITs are bucking the trend.

I know it sounds crazy, but REITs specializing in multifamily housing offer some of the clearest earnings outlooks of all.  Apartment landlords should deliver solid year over year revenue and earnings growth.

Why?

Simply put, apartment vacancies are falling and rents are rising.

According to commercial real estate analysts at Reis Inc (REIS), vacancy rates dropped to 5.6% in the third quarter… the lowest since 2006.  In the previous three months, vacancy rates were hovering around 5.9%.  And they were around 7.1% a year ago.

And don’t overlook the impact of higher rents.

Rents are up in 81 of the 82 metropolitan areas Reis covers.  And the average monthly effective rent rose 2.3% to $1,004 from $981 over the same period last year.

Obviously, it’s good for landlords when rents are going up and they’re renting more units.  And it’s going to be good for investors when residential REITs start reporting earnings this quarter.

One REIT I’m extremely bullish on is Avalonbay Communities (AVB).

They own and operate high end apartment complexes across the US.  And they have a good pipeline of new communities coming online in the near future.

They should deliver solid revenue and growth when they report quarterly earnings later this month.  And it should continue growing for years to come.

What’s more, AVB pays a solid 3.1% dividend yield.  That’s a solid income stream in any market…

Despite the solid fundamentals, AVB has been volatile lately.  It’s down more than 13% from the 52-week high.

You see, investors are worried the European credit crisis will cause the credit markets to freeze like they did in 2008.

Remember, REITs use a lot of debt in the way they operate.  So, if they can’t access credit, it’s going to hurt their business.  As a result, investors have sold AVB and other REITs because they’re afraid of another credit freeze.

The good news is, the Europeans have done enough to prevent another credit crisis like we had in 2008.  It may not be pretty, but as long as the credit markets don’t freeze, AVB is a screaming buy at these prices.

Don’t wait… take advantage of investor fear to pick up shares of AVB on the cheap.  This residential REIT will deliver solid earnings growth and pay you a handsome dividend now and for years to come.

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Category: Real Estate

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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