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We are in the midst of one of the busiest weeks of the current reporting cycle and the real estate investment trust (REIT) industry is buzzing with activity. In fact, two companies are lined up for their earnings releases — data-center REIT Iron Mountain Incorporated IRM and healthcare REIT Ventas, Inc. VTR — on Jul 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 the 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 U.S. 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.
As for data-center REITs, these are expected to have experienced a thriving market in the second quarter as well, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. However, aggressive pricing pressure is feared to have persisted in this quarter also.
Per the latest Earnings Outlook, overall earnings for the Finance sector, of which REITs are part, are expected to be up 24.1% year over year on 4.4% higher revenues. This represents the Q2 earnings and revenue expectations for the sector as a whole — i.e. after combining the reported actual results with the still-to-come estimates.
Let us take a look at how the above-mentioned REITs are placed ahead of their quarterly releases.
Boston, MA-based Iron Mountain provides records & information management services and data-center space & solutions in more than 50 countries with 1,400 facilities (spanning more than 85 million square feet).
Over the preceding four quarters, the company missed the funds from operations (FFO) per share estimates in three occasions and beat in the other, resulting in an average negative surprise of 1.26%. This is depicted in the graph below:
Iron Mountain Incorporated Price and EPS Surprise
Iron Mountain Incorporated Price and EPS Surprise | Iron Mountain Incorporated Quote
Notably, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years. These factors, along with an improved outlook for economic growth, are anticipated to provide substantial growth impetus to data-center REITs including Digital Realty Trust DLR, Coresite Realty Corporation COR and Iron Mountain, moving ahead. At such times, Iron Mountain’s business model focusing on expansion in fast growing markets bodes well.
Nonetheless, Iron Mountain’s Service top-line performance in the quarter to be reported is expected to reflect falling activity rates as stored records are becoming less active. While recovery is expected to be slow in the near term, achieving top-line targets remains a challenge. In fact, the Zacks Consensus Estimate for Q2 adjusted Service revenues of $385 million remained flat year over year.
Further, the company’s Q2 pricing power and margin growth performance will likely reflect unfavorable impact of the faces significant competition in North America owing to the fragmentation of the storage and information management service industry. (Read more: Iron Mountain to Post Q2 Earnings: What's in Store?)
Our proven model does not conclusively show that Iron Mountain is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.
(You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.)
Zacks ESP: Iron Mountain’s Earnings ESP is +3.77%.
Zacks Rank: Iron Mountain currently carries a Zacks Rank of 4 (Sell), which actually reduces the predictive power of ESP.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Chicago, IL-based Ventas is mainly engaged in the acquisition and ownership of seniors housing and healthcare properties, and leasing thoseto unaffiliated tenants or operating the samethrough independent third-party managers.
Per management, the population segment aged 80 years and older is anticipated to rise 50% between 2020 and 2030. Hence, we believe Ventas has a strong upside potential, with nearly 70% of its properties located in the coastal markets, to capitalize on this favorable trend.
Ami these, the Zacks Consensus Estimate for rental income from office building is currently pegged at $195 million, indicating a moderate increase from the last quarter.
Also, the Zacks Consensus Estimate for service revenues from medical office buildings is pegged at $3.38 million, reflecting an increase of 1.5% from the prior-quarter reported tally.
Importantly, during the April-June quarter, Ventas entered into a mutually beneficial agreement with Brookdale Senior Living that has combined the operator’s triple-net lease obligations into a single Master Lease.This arrangement is expected to favorably impact Ventas’ normalized FFO per share.
Ventas posted an average negative surprise of 1% over the trailing four quarters, surpassing estimates once, posting in-line results twice and missing estimates in the other occasion. The graph below depicts this surprise history:
Ventas, Inc. Price and EPS Surprise
Ventas, Inc. Price and EPS Surprise | Ventas, Inc. Quote
Furthermore, Ventas has a Zacks Rank of 3 and Earnings ESP of +0.82%. A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise. (Read more: Ventas Gears Up for Q2 Earnings: What's in the Cards?)
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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