The Q2 earnings season is in full swing for the real estate investment trusts (REIT), with several companies in the residential REIT space like Equity Residential (EQR - Analyst Report) , Select Income REIT (SIR - Snapshot Report) and UDR Inc. (UDR - Analyst Report) slated to report quarterly numbers on Jul 26.
So far, the big names of the broader REIT industry, including Prologis, Inc. (PLD) and SL Green Realty Corp. (SLG) have reported better-than-expected results. However, this does not assure an overall bright picture for the residential REIT industry, as these companies cater to an entirely different class of asset.
In spite of the benefits of a low-rate environment for their high debt-dependence nature, the performance of residential REITs depends largely on the demand-supply dynamics of this market. Therefore, it is imperative to examine the fundamentals of the sector to predict the odds of an earnings beat.
Per the early end-of-quarter apartment numbers given by Axiometrics, as new graduates enter the workforce and start looking for a place to live, along with renter families seeking settlement well ahead of the upcoming school year, rent growth was notably stronger in Q2, with quarterly effective rent growth coming in at 2.3% in the second quarter against 0.5% in the first.
However, delivery of new units in a number of markets moderated the annual effective rent growth rate, that clocked 3.7% in Q2, reflecting a 134-basis-point (bps) decrease from the solid year-ago growth rate of 5.1%.
New York and San Francisco have particularly been experiencing rising supply. This is a major concern as elevated supply of new units usually curtails landlords’ ability to command higher rents, thereby leading to lesser absorption.
Let’s take a look into how these three residential REITs are expected to perform, when they report their second-quarter 2016 results..
UDR has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold). Our proven model does not conclusively show that UDR is likely to beat on earnings this quarter. This is because the company lacks the right combination of the two key ingredients – a positive Earnings ESP (the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3.
