REITs Beating And Meeting FFO Estimates Yet Missing On Revenues: Is This A Sign Of Things To Come?
Newer investors sometimes struggle to understand the difference between earnings per share (EPS), funds from operations (FFO) and revenue in the context of real estate investment trusts (REITs).
Revenue represents the total amount of money that a company generates from sales, rents or other sources. Earnings per share refers to the company's profitability after deducting all expenses from its revenue.
Higher revenue does not guarantee significant profitability if expenses are also high. Conversely, even if revenue declines, a company can improve its overall profitability by reducing expenses. Mortgage REITs report earnings per share, but all other REITs report FFO. EPS is the ratio of net income to the number of outstanding shares of stock. FFO takes EPS and deducts the impact of taxes, losses and preferred dividends.
This week, several REITs reported FFO that either met or surpassed analyst estimates or were up year-over-year from the second quarter of 2022, but missed analysts' estimate numbers on revenue. Lagging revenue could be an indicator of potential recessionary trends to come. But the strong FFO could indicate that these companies are already proactively tightening their belts in anticipation of possible economic challenges ahead.
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Take a look at 10 REITs that recently reported FFO that either beat or met the consensus estimate or improved year over year, but missed estimates on revenue (note that M or B indicates millions or billions):
REIT Name | FFO/EPS per share | Estimates | Q2 2022 | Revenue (M or B) | Estimates | Q2 2022 |
Agree Realty Corp. | $0.98 | $0.98 | $0.56 | $129.9M | $130.64M | $104.88M |
Apollo Commercial Real Estate | $0.46 | $0.41 | $0.35 | $62.96M | $71.11M | $57.39M |
Claros Mortgage Trust | $0.35 | $0.30 | $0.43 | $80.92M | $80.99M | $69.24M |
Community Healthcare Trust | $0.62 | $0.57 | $0.62 | $27.81M | $27.96M | $24.05M |
Equity Commonwealth | $0.22 | $0.22 | $0.04 | $14.59M | $15.24M | $15.54M |
Four Corners Property Trust | $0.42 | $0.40 | $0.41 | $60.89M | $61.21M | $55.42M |
Independence Realty Trust Inc. | $0.28 | $0.27 | $0.26 | $163.60M | $164.95M | $154.64M |
LTC Properties Inc. | $0.66 | $0.65 | $0.64 | $31.54M | $47.25M | $31.63M |
NNN REIT Inc. | $0.80 | $0.80 | $0.79 | $202.43M | $203.4M | $190.78M |
The Weyerhaeuser Co. | $0.32 | $0.21 | $1.06 | $2B | $2B | $ 2.97B |
The 10 REITs shown in the table above are from a cross section of six REIT subsectors, signifying that it's not just one or two subsectors that are beginning to show this trend. Apollo Commercial Real Estate Finance Inc. (NYSE:ARI) and Claros Mortgage Trust Inc. (NYSE:CMTG) are mortgage REITs, Community Healthcare Trust Inc. (NYSE:CHCT) and LTC Properties Inc. (NYSE:LTC) are healthcare REITs,
Agree Realty Corp. (NYSE:ADC), Four Corners Property Trust Inc. (NYSE:FCPT) and NNN REIT Inc. (NYSE:NNN) are all triple-net REITs with a focus on retail. Equity Commonwealth (NYSE:EQC) is an office REIT, The Weyerhaeuser Co. (NYSE:WY) is a timberland specialty REIT and Independence Realty Trust Inc. (NYSE:IRT) is a residential REIT.
Often, volatile stock price movements after earnings or revenue misses are just temporary. The key drivers for REIT price appreciation are increases in revenue and EPS/FFO over the years.
For a long-term investor, the focus should be on improvements in earnings and revenue year over year, as they carry more significance than whether the metrics beat or missed estimates by a penny or two in the present quarterly report. It's worth noting that stocks that are unjustly punished for minor misses can present buying opportunities following the release of the earnings reports.
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