After performing strongly through the end of last year, the real estate investment trust (REIT) space has lost ground this year, largely reflecting Fed-centric anxieties. The total return from the FTSE NAREIT All REIT Index decreased 1.45% as of Oct 5, 2015 as against a 27.15% positive return in 2014.

The group’s weak recent performance notwithstanding, the outlook for REITs remains favorable. Fed uncertainty no doubt remains a dominant theme for the industry, but the central bank appears in no hurry to start the monetary policy normalization process, particularly following the recent bout of soft economic data.

Fed’s Course on Rate Policy and REITs

Though the Fed held off from raising rates last month, it  kept alive hopes for a 2015 hike. However, since then, things have taken a U-turn with ISM numbers failing to meet expectations and the latest job numbers looking abysmal. This has caused many to suspect that the U.S. economy might have already started feeling the heat from the nagging global economic weakness. As a result, the expectation for a rate hike was further pushed back to 2016.

While the continuity of a low rate environment is now anticipated for an extended period, such an environment cannot be a perpetual one. Though REITs (those having shorter leasing periods) with the power to adjust their rent quickly to a rate hike look quite bankable, the individual market dynamics of different asset types owned and managed by the REITs would be needed the most for the stocks to excel.

After all, everything is not possible virtually, and one will eventually need “real space” for economic activities. For this special hybrid class, this is their most fundamental strength, and their ability to boost shareholders’ value through steady dividend payouts makes them all the more attractive.

Dividends Still Standing Tall

The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. And as of Jul 31, the dividend yield of the FTSE NAREIT All REITs Index was 4.14% while the yield of the FTSE NAREIT All Equity REITs Index was 3.70%. Clearly, the REITs continue to offer decent yields and outpaced the 2.07% dividend yield offered by the S&P 500 as of that date.

Capital Access

Moreover, REITs have been proactive in the capital market in recent years leveraging on the low rate environment to improve their financials. As of July 31, REITs raised $42.4 billion in initial, debt and equity capital offerings (IPOs - $1.4 billion, Secondary Common - $19.5 billion, Secondary Preferred - $1.8 billion and Secondary Debt - $19.7 billion). This indicates the rise in investors’ confidence in this sector and their willingness to pour money into it.

Zacks Industry Rank - Positive

Based on the earnings outlook for the constituent companies in each industry, we rank all of the 260+ industries in the 16 Zacks sectors. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with a Zacks Industry Rank #88 and lower (the top one-third of the list) is 'Positive,' between #89 and #176 is 'Neutral,' and #177 and higher (the bottom one-third) is 'Negative.’

REITs are broadly grouped into the Finance sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level. Currently, the Zacks Industry Rank for REIT Equity Trust - Retail is #21, REIT Equity Trust - Residential is #26, REIT Equity Trust - Other is #76 and REIT Mortgage Trust is #209. This indicates that but for the mortgage REIT industry, the overall outlook for this space remains positive for the near term.

Earnings Trends

We have just concluded the third quarter and earnings releases are scheduled for the upcoming weeks. In the second quarter of 2015, the broader Finance sector, of which the REITs are part, experienced a growth of 7.2% year over year in earnings and 1.5% in revenue.

Finance is expected to have another positive quarter, with total earnings for the sector projected to move up 8.6% from the comparable period a year ago. For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

How Will the Players Fare This Earnings Season?

With the third-quarter earnings season round the corner, a pretty good idea would be to look for the combination of favorable Zacks Rank and Earnings ESP.

Earnings ESP, which represents the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate, is a meaningful and leading indicator of a likely positive earnings surprise.

Notably, for a stock, when positive earnings surprise is accompanied with a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold), the chances for that stock to beat earnings in the upcoming quarter increases. Stocks like Simon Property Group Inc. (SPG - Analyst Report), American Assets Trust, Inc. (AAT - Snapshot Report), CubeSmart (CUBE - Snapshot Report) and National Health Investors Inc. (NHI - Snapshot Report) have such a favorable combination.

However, one should avoid stocks with Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.