REITs to Watch for Q1 Earnings on Apr 27: SPG, VTR & NRZ
We are in the heart of the first-quarter earnings season and 154 members of the S&P 500 index have already reported their financial numbers. Per the latest Earnings Preview, performances of these index participants indicate a 25.4% increase in total earnings on 10.3% higher revenues compared to the prior-year period. The beat ratio is impressive, with 80.5% companies surpassing bottom-line expectations and 72.1% outperforming top-line projections.
In fact, the real estate investment trust (REIT) space is bustling with activity, and Simon Property Group SPG, Ventas, Inc. VTR and New Residential Investment Corp. NRZ are set to release their quarterly numbers on Apr 27.
With underlying asset categories and the location of properties playing a crucial role in determining REITs’ performance, rate hike and cautious approach of investors have affected returns for this industry. In fact, healthcare REITs are most sensitive to spiking interest rates, courtesy long-term leases and narrow re-leasing spreads. Also, taking into consideration high dividend yield, healthcare REITs have comparatively higher correlation with the 10-year US Treasury yield and perform poorly relative to other REIT sectors in a rising interest rate scenario. While there are pockets of strengths in this sector, like strong demand stemming from favorable demographics, oversupply in senior housing facilities and tilt toward outpatient care remain immediate concerns. Further, operators of skilled nursing facilities (SNFs) have been disadvantages, thanks to the fall in private-pay healthcare, low margins and heavy government control. Deteriorating fundamentals of this sector also remain headwinds.
Retail REITs are facing a different set of challenges. Recent data from real estate research firm — Reis — states that U.S. retail real estate vacancies persisted at the 10% levels for first-quarter 2018. Additionally, mall traffic continues to suffer as e-commerce has been increasingly capturing market share from the traditional brick-and-mortar stores, compelling retailers to resort to online options or file bankruptcy. In fact, the first few months of the year witnessed several preeminent retail bankruptcy filings and record-high defaults by retail corporates.
In addition, the latest report from the real estate technology and analytics firm — RealPage, Inc. RP — states that the national apartment market moderated in the Jan-Mar quarter. Nevertheless, the first quarter marks a slow leasing period, thanks to the cold weather that inhibits shift of households and curbs growth in demand. Going by statistics, annual rent growth shrunk to 2.3% in Q1.
Let’s have a look at what can be expected from the above mentioned REITs.
Simon Property has been quickly adapting to the changing retail landscape by increasingly adopting omni-channel strategies and overhauling properties. Importantly, the company is entering into several partnerships for upgrading services and amenities provided to its customers. It has also re-launched its brand and marketing programs, and has resorted to micro-retail modeling as well. Such moves make its shopping malls appealing and are expected to have been conducive to revenue growth in the to-be-reported quarter.
Also, during the quarter, Simon Property improved its financial strength by amending and extending its 3.5-billion unsecured multi-currency revolving credit facility. This, when combined with the existing $4.0-billion revolver, offers the company $7.5 billion of total revolving credit capacity. Increased financial flexibility supports the company’s active redevelopment and expansion pipeline. (Read more: What’s in the Cards for Simon Property Q1 Earnings?)
The funds from operations (FFO) and revenues of the company are projected to register 3.3% and 2.3% year-over-year growth in first-quarter 2018.
Furthermore, according to our quantitative model, chances of Simon Property likely beating the Zacks Consensus Estimate in the first quarter are high. This is because it has the right combination of the two key ingredients — positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which is required to increase the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter
The Earnings ESP for Simon Property is +0.32% and it carries a favorable Zacks Rank of 3.
Simon Property Group, Inc. Price and EPS Surprise
Ventas is anticipated to have benefited in the first quarter from increasing healthcare spending and aging population. Also, Ventas accomplished the sale of its 36 skilled nursing facilities (SNF), which were being operated by Kindred Health care. The move helped it reap $700 million in proceeds and enabled the company to “de-emphasize” this particular healthcare real estate category.
Nonetheless, impact of oversupply in some markets might reflect in the performance of Ventas’ senior housing assets. Amid these, the Zacks Consensus Estimate of $204 million for triple net-leased rental income underscores a sequential decline from the prior-quarter figure of $205 million. Further, the Zacks Consensus Estimate for office building and other services revenues is $3.83 million, highlighting a 1.8% decline sequentially. (Read more: Ventas to Post Q1 Earnings: What’s in the Offing?)
Importantly, the Zacks Consensus Estimate for the first-quarter revenues is pegged at $850.6 million, indicating a year-over-year fall of 3.7%.
Amid these, chances of the company beating earnings estimates in the first quarter are low. This is because it has an Earnings ESP of -0.87% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ventas, Inc. Price and EPS Surprise
New Residential Investment focuses on investing in, and actively managing investments related to residential real estate. The company primarily targets investments in excess mortgage servicing rights (MSR), residential mortgage backed securities, residential mortgage loans and other related investments. The company continued to acquire MSRs in first-quarter 2018.
Prior to the first-quarter earnings release, there is lack of any solid catalyst for raising optimism about the company’s business activities and prospects. As such, the Zacks Consensus Estimate for FFO per share for the soon-to-be-reported quarter remained unchanged at 55 cents, over the past month. Nonetheless, this indicates a year-over-year increase of 1.85%.
Nonetheless, revenues are expected to remain depressed. The Zacks Consensus Estimate for sales is $186 million, which reflects a year-over-year decline of 4.3%.
The company posted an average positive surprise of 27.3% over the trailing four quarters, surpassing estimates in three occasions and posting in-line results in the other. The graph below depicts this surprise history:
New Residential Investment Corp. Price and EPS Surprise
Also, chances of New Residential Investment beating the Zacks Consensus Estimate in the first quarter are low. This is because it has an Earnings ESP of 0.00% and a Zacks Rank of 3.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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RealPage, Inc. (RP): Free Stock Analysis Report
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Ventas, Inc. (VTR): Free Stock Analysis Report
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