We are in the heart of the ongoing reporting cycle and the real estate investment trust (REIT) space is buzzing with activity. In fact, there have been a deluge of Q2 earnings releases this week, and next we have Welltower Inc. (HCN - Free Report) , Ventas, Inc. (VTR - Free Report) and Iron Mountain Incorporated (IRM - Free Report) releasing quarterly numbers on Jul 28.
Admittedly, rate hike and cautious approach of investors have deterred gains from this industry so far this year. However, with underlying asset categories and the location of properties playing a crucial role in determining the performance of REITs, not all players in the space have equally excelled or fallen behind.
In fact, a number of asset categories displayed strength in second-quarter 2017, with the economy and the job market showing signs of recovery. Going by numbers, per a study by the commercial real estate services’ firm – CBRE Group Inc. (CBG - Free Report) – the overall U.S. industrial real estate market remained upbeat in the second quarter, with the industrial availability rate contracting 10 basis points to 7.8%.
In addition, the U.S. office vacancy rate remained steady at 13% in the second quarter amid a balanced demand-supply environment. Moreover, growth in cloud computing, Internet of Things and big data are not only helping tech companies, these are also driving demand for data center REITs. Additionally, defying concerns about supply in the market, the residential real estate market is back with a bang driven by robust demand levels.
However, dwindling mall traffic and store closures amid aggressive growth in online sales have kept retail REITs on tenterhooks. Also, for healthcare REITs, rising supply of senior housing units is expected to have put a pressure on pricing in some markets.
Therefore, surprises might be in store for some REITs, while others may disappoint this earnings season. However to predict that, we rely on the Zacks methodology, combining a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or at least 3 (Hold) – and a positive Earnings ESP, to predict the chances of a beat this quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Per our proprietary methodology, Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Research shows that with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70% for the stocks.
Let’s have a look at what’s in store for the three REITs set to release quarterly results on Friday:
Toledo, OH-based, Welltower’s efforts to enhance its healthcare real estate portfolio quality through prudent asset allocation and disposal, along with its diversified portfolio, are anticipated to boost its performance in the quarter to be reported. Additionally, rising senior citizen population will likely prove conducive to growth.
However, interest rate hike remains a concern for Welltower due to its high exposure to long-term leased assets. In addition, increased deliveries in certain markets are likely to adversely affect the company's pricing power and occupancy. Further, intense competition from national and local healthcare operators curtails the company’s power to significantly improve its top line and ink deals at attractive rates. (Read more: What's in the Cards for Welltower in Q2 Earnings?)
Welltower has an Earnings ESP of 0.00%. However, it currently has a Zacks Rank #4, which actually reduces the predictive power of ESP.
Over the trailing four quarters, Welltower posted in-line funds from operations (“FFO”) per share in one occasion and beat estimates in the other three, recording an average positive surprise of 0.9%. The graph below depicts this surprise history:
Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share.
Chicago, IL-based healthcare REIT Ventas is anticipated to benefit in the to-be-reported quarter from its diversification efforts, increasing healthcare spending and aging population. Furthermore, its strong balance sheet positions it well for growth. Moreover, university-based life science real estate is a new zone of investment that has grabbed attention and Ventas has, by now, already committed nearly $2 billion to this segment.
However, hike in interest rate is a concern for Ventas, as the company has considerable exposure to long-term leased assets. Additionally, rising supply of senior housing units is expected to have a pressure on pricing in some of the company’s markets. (Read more: Ventas to Report Q2 Earnings: What's in the Cards?)
Ventas has an Earnings ESP of 0.00% and a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s zero ESP makes our surprise prediction difficult.
Ventas posted an average positive surprise of 0.99% with respect to FFO per share over the trailing four quarters, surpassing estimates twice and posting in-line results in the other occasions. The graph below depicts this surprise history.
Boston, MA-based specialty REIT Iron Mountain deals in storage and information management services. The company’s diversified revenue base remains a positive. Additionally, a solid product portfolio and increasing market share are growth catalysts.
However, Iron Mountain’s Service revenues remain modest due to declining activity rates as stored records are becoming less active. In addition, the storage and information management services industry remains a highly fragmented industry with intensifying competition. Further, the company’s highly-leveraged balance sheet remains a concern. (Read more: Iron Mountain to Post Q2 Earnings: What's in Store?)
Presently, Iron Mountain has a Zacks Rank #4 (Sell) and an Earnings ESP of +7.69%. Though a positive ESP is a significant indicator for an earnings beat, its rank actually reduces the predictive power of ESP.
Iron Mountain has witnessed negative surprises in three of the trailing four quarters, resulting in an average negative surprise of 7.56%. This is depicted in the graph below.
Check later our full write-up on earnings releases of these stocks.
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.
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