With the smoke clearing from a busy month of REITs reporting their third-quarter results, it is apparent that the sector is once again returning to earnings growth, said Neil Downey, Managing Director of Global Equity with RBC Capital Markets.
“The trend line in earnings that we had been expecting, more specifically a gradual return to year-over-year earnings growth, materialized,” he said. The RBC analyst said the key determinant for his firm is a focus on FFO per share, which is not usually inflated by REITs making acquisitions and issuing more units. That measure grew by 2% in the quarter, ahead of a forecasted growth rate of 1%.
Downey said that 80% of reporting issuers beat or met forecast earnings expectations, and there were few real standouts. “There were a handful of companies that beat expectations on the bottom line based upon the strength in core operating results. That is exactly what we like to see.”
Of the 13% of REITs and REOCs reporting that failed to meet earnings expectations, in the majority of cases it was special events or accounting changes that brought down their results.
“Our broad thesis is that earnings are trending in the right direction for 2011 as a whole,” Downey said. “We think earnings growth will be slightly positive, and that is after two years of slightly negative earnings growth. The world is a shaky place right now and everybody is focused on global macro-economic issues, most notably the problems in Europe. But when one focuses upon more local dynamics, it seems like, for the most part, property market fundamentals are stable to getting just a little bit better, in just about every asset class and in just about every region.”
Providing that interest rates stay stable Downey expects that debt coming due in 2012 will almost universally be refinanced at a lower interest rate. “We actually think that earnings growth is going to be possibly a fair bit better in 2012,” he concluded.
“We still have some interest rate roll-down opportunity ahead of us in 2012, and almost every REIT or REOC with debt coming due should be able to refinance at lower interest rates” providing that interest rates stay stable.”
In a third-quarter recap report, the real estate analyst wrote that his firm's 2012 forecast calls for “+6% growth, reverting to a more normal long-term average of +3% to +4% in 2013. Next year's outlook is predicated upon:
(1) Steady to improving market fundamentals across virtually all property segments;
(2) The full-year effect of this year's heightened acquisition volume; and
(3) Significant interest rate roll-down opportunities.”
Just over 50% (16 of 30) of reporting entities posted third-quarter earnings that were in-line with expectations. Nine (30%) exceeded forecast, while four (13%) were short of expectations, RBC Capital Markets reported.
Core operating results and recurring income items allowed CAP REIT, Chartwell REIT and Morguard Corp. to exceed expectations. At the other end of the spectrum results from Brookfield Asset Management and Extendicare REIT were well short of estimates, the financial firm said.
Those on RBC Capital Markets' “outperform” list of REITs and REOCs: Brookfield Asset Management, Calloway, CREIT, Extendicare, First Capital Realty, H&R, MI Developments, Morguard Corp., and Morguard REIT.