In the heart of Q4 earnings season, it is apparent that overall growth is stressed this quarter too. The slowing of the global economy, weakness in oil and other commodity prices, and the strengthening of the dollar against other currencies, are taking its toll on business activity. 
 
While the broader Finance sector, of which the real estate investment trusts (REITs) are a part, has found a reason to rejoice for its 8% growth, yet the overall weakness in top line is palpable. (Read: Q4 Earnings Season: All Around Growth Challenges).
 
Importantly, though the Fed refrained from making any hike in rates at its recently concluded two-day meeting in January, but they kept the option open for the same in March. The recent bout of soft economic data, right from GDP numbers to the ISM manufacturing index, amid global worries have raised doubts about the probability of a March hike and any further raises in 2016.
 
That makes the ground favorable for the REITs for some more time, as their cost of debt would remain low. Moreover, for income investors, REITs appear good choices in this volatile environment because real estate usually generates steady and dependable cash flows.
 
And in this earnings season, with the majority of the REITs yet to report, we believe the time is apt to explore the industry fundamentals and the past-quarter performance to figure their chances of beating. Generally, an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation.
 
REIT Fundamentals Remains Stable
 
A look at the fundamentals of REITs confirms stability and strength. A recent study by the commercial real estate services’ firm CBRE Group Inc. (CBG) shows healthy demand for U.S. commercial real estate in Q4, with a decrease in vacancy rates across property types like office, industrial and retail sectors amid steady absorption and comparatively limited supply.
 
Per the CBRE Group study, during Q4, the vacancy rate in the office sector declined 20 basis points (bps) sequentially to 13.2% while the industrial availability rate moved south by 20 bps to 9.4%. Moreover, the retail availability rate fell 10 bps to 11.2% while vacancy in the apartment sector was 4.6%.
 
Going by the demand-supply picture, the prospects of REITs look bright for the fourth-quarter earnings season. The time is thus ripe to build positions in stocks from this space.  
 
How to Select the Best Stocks?

Selecting the best stocks might be a daunting task unless one knows the right method. This is because, though the above-mentioned REIT sub-sectors might have experienced continued strength, not all their stocks are equally poised to benefit.
 
Therefore, to shortlist such stocks we rely on the Zacks methodology, combining a favorable Zacks Rank – 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 the stocks with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70%.
 
Here are 3 REIT stocks that have the right combination of elements to deliver an earnings beat when they release their fourth-quarter results:
 
Extra Space Storage Inc. (EXR - Snapshot Report) has a Zacks Rank #1 and an Earnings ESP of +2.30%. The Zacks Consensus Estimate for the fourth quarter is pegged at 87 cents per share. The company delivered positive earnings surprises in three out of the last four quarters, with an average beat of 2.05%.
 
Extra Space Storage Inc. is a fully integrated, self-administered and self-managed real estate investment trust that acquires, develops and operates self-storage facilities. The company is based in based in Salt Lake City, UT. 
 
- Extra Space Storage is slated to release fourth-quarter results after market close on Feb 23.
 
Vornado Realty Trust (VNO - Analyst Report) carries a Zacks Rank #2 and has an Earnings ESP of +4.65%. The Zacks Consensus Estimate for the fourth quarter is pegged at $1.29 per share. Over the past four quarters, the company delivered average positive earnings surprises of 8.64%.
 
Vornado Realty Trust is a fully integrated real estate investment trust. The company owns, directly or indirectly, office building properties; retail properties; merchandise mart properties; temperature controlled logistics; and other real estate investments. It is one of the largest property owners in New York City.
 
- Vornado is scheduled to report fourth-quarter results after the market closes on Feb 16.
 
EPR Properties (EPR - Snapshot Report) has a Zacks Rank #3 and an Earnings ESP of +1.72%. The Zacks Consensus Estimate for the quarter is $1.16 per share. The company delivered positive earnings surprises in all the last four quarters, with an average beat of 4.25%.
 
This Kansas City, MO-based company is a specialty real estate investment trust that invests in three primary segments, namely entertainment, recreation and education. Its properties include megaplex theatres, entertainment retail centers, and destination recreational and specialty properties.
 
-EPR Properties is slated to report fourth-quarter results after market close on Feb 24.
 
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income