The majority of real estate investment trusts (REITs) are expected to post positive earnings for the fourth quarter and fiscal year 2011 as rent growth continues, according to analysts.

REITs, which are required to pay 90 percent of taxable income to investors each year, have outpaced the broader market, with average annual returns surpassing 10 percent over the past decade. REITs focus on renting properties -- generally either office, residential, industrial or hotels -- which has partially sheltered them from plunging real estate prices. Most profits are reinvested into building improvements or acquisitions, but the sector also has high yields for investors.

We think REITs are in a good spot, said Alexander Goldfarb, senior REIT analyst with Sandler O'Neill + Partners. The current economic environment is conducive to them.

He said that economic growth has boosted demand from tenants, but hasn't been strong enough to encourage excess development, restraining the amount of empty space on the market. Around a third of proposed development projects are unable to secure financing, said Goldfarb.

He cited American Campus Communities (NYSE:ACC), a holder of student housing, as a strong performer and sees Post Properties Inc. (NYSE:PPS), trading around $44.37 per share on Friday, and DDR Corp. (NYSE:DDR), trading around $14.11 per share, as undervalued stocks.

But there are some who doubt the industry will continue to grow. REITs are the third-most shorted sector in the Standard & Poor's 500, according to Goldfarb, with 4.4 percent of shares held short as of Jan. 26.

Each subsector of the REIT industry faces different conditions, but analysts see upsides across the industry.

(Note: REITs report funds from operations, rather than earnings per share, as the most significant measure of financial performance. Funds from operations measures cash flow from properties by adding earnings to depreciation costs, because real estate is likely to appreciate in value, rather than dropping.)

Office

There remains a bifurcation between gateway cities like New York and Washington, D.C., and less prominent suburban markets. The largest U.S. cities benefit from strong infrastructure and the presence of major corporations to fill space, which has kept vacancy rates low. Cuts in the financial center have negatively impacted leasing, but the rise of media and technology firms has offset losses.

SL Green (NYSE:SLG), Manhattan's largest office landlord, reports earnings after markets close on Monday, Jan. 30. According to FactSet, analysts predict funds from operations of $1.01 per share, up from 93 cents in the previous year. Reuters projects revenue of $288.2 million, up 23.1 percent from the previous year.

The REIT has been aggressively pursuing new acquisitions in New York. Earlier this month, it partnered with an institutional investor to buy 10 East 53rd Street, publisher HarperCollins' headquarters, for $252.5 million.

Shares of SL Green were trading around $73.56 on Friday.

Another major office landlord, Mortimer Zuckerman's Boston Properties (NYSE:BXP), reports earnings after markets close on Tuesday, Jan. 31. According to FactSet, the analyst consensus for funds from operations is $1.19 per share, up from 64 cents per share.

Revenue is forecast to be $426.5 million, 39.8 percent higher than $305 million in the fourth quarter of 2010, according to Reuters. Shares of Boston Properties were trading around $103.46 on Friday.

Suburban office markets haven't seen the same demand as cities, but REITs have some advantages compared to private landlords, said Mitchell Germain, an analyst with JMP Securities. They have better access to capital and, in some cases, a proven brand, which can be crucial for securing prospective tenants.

I think the office sector is one that could somewhat surprise, said Germain.

Retail

Retail landlords have endured mixed consumer spending and the bankruptcy of a number of large stores, including Borders and Syms. But the fourth quarter is expected to be positive.

We expect steadily improving fundamentals as leases signed during 2011 continue to come online as well as a seasonal boost from the 4Q holiday season, Ross Smotrich, a REIT analyst with Barclays Capital, wrote in a research note.

Simon Property Group (NYSE:SPG), the largest U.S. mall operator, will report earnings on Friday, Feb. 3, before the market opens. Funds from operations are projected to be $1.90 per share, up from $1.78 per share in the prior year, according to FactSet.

Goldfarb, of Sandler O'Neill + Partners, considers Simon as one of the strongest REITs.

Things are less rosy for General Growth Properties (NYSE:GGP), the second largest mall operator, which will report earnings on Wednesday, Feb. 8, after markets close. According to FactSet, analyst consensus is funds from operations of 27 cents per share, up slightly from 26 cents per share in the previous year.

General Growth is still reorganizing after exiting bankruptcy in 2010. This month the firm spun off its weaker malls into a separate company, Rouse Properties. It also has around one billion shares outstanding, making it more difficult to deliver large funds from operations per share growth, said Goldfarb. He said it would be a long time before General Growth was again a top contender.

Residential

Perhaps the strongest subsector is multifamily housing, which has enjoyed a 10-year low rental vacancy rate.

The multifamily sector continues to benefit from a very poor sentiment towards home purchase and the lack of development, said Germain of JMP Securities.

Sam Zell's Equity Residential (NYSE:EQR) reports earnings after markets close on Wednesday, Feb. 1. Analysts surveyed by Reuters project funds from operations of 65 cents per share, up from 61 cents. Rental income is forecast to rise to $521.4 million from $515.2 million.

Equity has been pursuing a stake in Archstone, owner of over 70,000 U.S. apartment units, to expand its portfolio. Archstone was a former REIT that was privatized by Lehman Brothers following a leveraged buyout during the boom. Last week, the estate of the failed bank increased its stake in the company to 73.5 percent, blocking a bid by Equity.

Equity can bid for the remaining 26.5 percent, which is owned by Barclays and Bank of America, but Lehman has the right to block the deal with its own offer, although Equity would be entitled to an $80 million breakup fee from the banks. With full control, Lehman might seek to take Archstone public again and use the profits to pay back creditors.

The luxury apartment landlord AvalonBay Communities Inc. (NYSE:AVB) reports earnings after markets close on Wednesday, Feb. 1. Analysts polled by Reuters forecast $1.21 per share in funds from operations in $255.1 million in revenue, excluding one-time fees, up from $1.01 per share in funds from operations and $229.9 million in the previous year.

Outlook

Barring drastic macroeconomic changes, REITs are expected to continue to do well through 2012, although a full recovery won't be possible without sustained job growth and consumer spending.

The conservative guidance of companies' management teams in prior quarters could help them beat estimates in the future, said Germain, leading to a beat and raise scenario where they become more bullish as 2012 moves forward.

We should continue to see REITs come in line or slightly ahead of expectations, he said.

Low interest rates should also help the companies grow, and small development activity is expcted to keep excess supply in check.

I don't see any reason that REITs should not have another good year, said Goldfarb.

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