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REITs to Watch for Q2 Earnings on Aug 2: REG, AIV and HCP

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The second-quarter earnings season is past the halfway mark with results from 265 S&P 500 members out as of Jul 27.

Per the latest Earnings Preview, total earnings of these index members witnessed 23.6% year-over-year (y/y) growth on the back of 10.1% higher revenues. Beat ratios are impressive with 80.8% of the companies beating earnings estimates and 72.1% surpassing revenue expectations.

Further, the report indicates that second-quarter earnings for total S&P 500 companies are projected to improve 23.6% year over year, with total revenues rising 8.8%.

Let's concentrate on REITs and find out how companies in this space are poised to perform this season. Although underlying asset categories and location of properties play a vital role in determining REITs’ performance, not all companies in this space are equally poised to excel or fall behind, this season.

The unemployment rate in the United States during the June-end quarter was in the 3.8-4% band. This historic low level of unemployment spurred demand for new housing units. In fact, there is a steady demand for rental apartments from new millennial households as well as empty nesters. However, the latest report from the real estate technology and analytics firm, RealPage, Inc (RP - Free Report) , suggests that rent growth in the U.S. apartment market is slowing. In fact, U.S. apartment rents increased at an annual pace of just 2.3% as of mid-2018, marking its slowest pace in eight years. This deceleration in rent growth suggests that a competitive leasing environment is fast building up amid elevated supply, and curbing landlords’ pricing power.

Retail REITs also have their share of challenges as online retailers continue to dent performance of brick-and-mortar stores, leading to widespread store closures and bankruptcy filing. In fact, the national retail vacancy rate marginally increased to 10.2% in the second quarter, underlining store closures of bankrupt toy retailer, Toys “R” Us Inc., per data form Reis, Inc , while national average asking rents edged 0.2% higher.

As for healthcare REITs, these are relatively immune to the macroeconomic problems faced by office, retail and apartment companies because even amid tough economic conditions, consumers need to spend on healthcare services, while curtailing discretionary purchases. However, due to long-term leases and narrow re-leasing spreads, rising interest rates (the Federal Reserve hiked interest rates in June, marking the seventh increase since December 2015) have caused havoc for these companies.

Let's take a look at some REIT stocks scheduled to report second-quarter 2018 earnings on Aug 2 and how things are shaping up prior to the announcement.

Apartment Investment & Management Co. (AIV - Free Report) — commonly known as Aimco — is expected to witness y/y growth in funds from operations (FFO) per share, while the top-line results will likely display a decline.

Over the trailing four quarters, the company outpaced the Zacks Consensus Estimate in two occasions and reported in-line numbers in the other two. Overall, the stock witnessed an average positive surprise of 0.82%. This is depicted in the chart below:

Apartment Investment and Management Company Price and EPS Surprise

On Apr 26, the company announced plans to sell its asset-management portfolio, along with four affordable garden-style communities, for $590 million. While such streamlining efforts are a strategic fit for the long term, the near-term dilutive effect cannot be bypassed. In fact, such short-term impact is likely to drag the company’s quarterly results.

Notably, the Zacks Consensus Estimate for Q2 revenues is pegged at $244.5 million, indicating a year-over-year decline of 1.8%.

Prior to the Q2 earnings release, there is lack of any solid catalyst for raising optimism about the company’s business activities and prospects. Over the past month, the Zacks Consensus Estimate for FFO per share for the soon-to-be-reported quarter remained unchanged at 62 cents. This indicates a 1.6% year-over-year increase. For the April-June quarter, management projects pro-forma FFO per share of 57-61 cents.

What Our Model Says    

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Conversely, Zacks Rank #4 (Sell) or #5 (Strong Sell) stocks are best avoided.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

While Aimco has a favorable Earnings ESP of +3.70%, a Zacks Rank of 4 makes it difficult for us to predict an earnings beat.  (Read more: Why Q2 Earnings Could Be Dampening for Aimco Stock)

HCP Inc. has an impressive surprise history. In fact, over the trailing four quarters, this REIT exceeded estimates in each occasion, coming up with an average positive beat of 3.24%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise

In the to-be-reported quarter, the company is likely to have gained from rising healthcare spending and a growing aging population. In fact, the Zacks Consensus Estimate for Q2 rental and related revenues of $282 million indicates a slight increase from the previous quarter’s reported tally of $280 million.   

Importantly, strategic divestitures, in order to lower its Brookdale-portfolio concentration, are anticipated to have driven the company’s Q2 performance. This June, it announced the disposition of five Brookdale communities for $32 million and is under contract to sell another 15 communities for $98 million. This move will considerably bring down Brookdale’s concentration in HCP’s portfolio, and increase lease coverage of the remaining triple-net assets leased to Brookdale.

In its life-science segment, we estimate occupancy to have shrunk 100 basis points (bps) as compared to the previous quarter, while revenues are anticipated to be nearly $100 million. Also, the Zacks Consensus Estimate for revenues from medical office is pegged at $124 million.

Notably, a rising interest rate scenario also remains a concern for HCP. We anticipate the company to have incurred higher interest expense in Q2, which might dampen its bottom line.

While HCP has a favorable Earnings ESP of +0.60%, a Zacks Rank of 4 makes it difficult for us to predict an earnings beat.(Read more: Will Rising Healthcare Spending Aid HCP This Earnings Season?

Regency Centers Corp.’s (REG - Free Report) Q2 performance is anticipated to reflect year-over-year fall in funds from operations (FFO) per share. However, its top-line results might display growth, on a year-over-year basis.

It beat the Zacks Consensus Estimate in three of the trailing four quarters and met in the other, with an average surprise of 2.47%. This is depicted in the graph below:

Regency Centers Corporation Price and EPS Surprise

Regency has been focusing on building a premium portfolio of grocery-anchored shopping centers, which are usually necessity driven and enjoy dependable traffic. Hence, we anticipate the company to have experienced decent leasing activity and rental revenues growth during the quarter to be reported.

In fact, the Zacks Consensus Estimate for second-quarter revenues is pegged at $268.8 million, indicating a year-over-year improvement of 11.8%.

On the investment front, Regency has resorted to strategic acquisitions in a bid to fortify its portfolio in flourishing sub-markets. Such accretive investments are estimated to strengthen portfolio and support its operating performance in the near future.  

These efforts have consistently enabled the company to witness continued net operating income (NOI) growth. In the quarter under review also, we expect the company to have witnessed robust cash flow generation and impressive NOI growth.

Regency will likely beat earnings estimates this season as it has an Earnings ESP of +0.33% and a Zacks Rank of 3. (Read more: Can Regency Centers Surpass Estimates in Q2 Earnings?)

You can see the complete list of today’s Zacks #1 Rank stocks here.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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