1Q19 Earnings are upon us

For our take on the earnings reports of individual stocks please check out the portfolio analytics section of the website.  Thus far, WPG, IRM and WY have reported and the earnings updates are now live.

In this update, I want to discuss the general feel of this earning season and what makes it different from previous ones.  Take these comments with a big grain of salt because they are of a nature that cannot be proven and in some cases cannot even be researched.  These are just my opinions on what the market is looking for in upcoming reports.

  • Cost control

FFO margin has been slipping lately with many REIT sectors putting up great revenue figures that just aren’t translating to the bottom line (IRM is a good example and they got punished heavily by the market).  REITs that tighten the purse strings successfully will likely be rewarded.  Within the 2CHYP portfolio, WY, FPI and GOOD have been particularly strong at controlling costs.

  • Inflection points

With over 10 years of economic expansion, the market is becoming increasingly wary of when the good times will end.  Thus, I think there will be an increased focus on trying to discern inflection points in industries that have had nice growth.  Look for the 2nd derivative of earnings (acceleration or deceleration of growth) to get an early glimpse of inflection points.  Industrial and self-storage REITs are on watch given the rapid growth they have experienced in recent years.  I think industrial REITs will continue growing while self-storage is facing a negative inflection as growth decelerates or even turns negative.

  • Buybacks

Many of the more undervalued REITs are taking matters into their own hands with large and continuous buybacks.  The market has yet to reward this behavior despite its mathematical value creation.  If companies can successfully frame these buybacks in the right way, the market may begin to see it as a signal that the stocks are underpriced.

2CHYP Portfolio Snap Shot

4/25/19 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  We sold 280 shares of Gladstone Commercial (GOOD) at $12.25 and bought 1100 shares of Farmland Partners (FPI) at $6.23.