3Q16 earnings season continued with many of our companies reporting including MPW, STAG, and AHT. For the most part, the reports were in-line with consensus or slightly better with each company building on their respective track records of FFO/share growth.
MPW’s report was of particular interest as the stock fell absurdly far this week, yet both the numbers and the call improved our confidence in their operations. 2017 guidance was provided at a level which represents their highest normalized FFO/share to date as well as being above 2017 consensus estimates. EBITDAR coverage remains strong across their portfolio including the Adeptus properties which analysts are concerned about. We believe the chance of successful continuation with Adeptus or replacement at a similar rent level is quite high as the properties are essential to the local populations and therefore must remain open. Even in the worse case scenario in which Adeptus fails and MPW cannot re-lease the properties, the stock would be cheap at well under 10X forward FFO.
STAG’s report was a mixed bag as its disposition activity was disappointing but leasing was strong. Specifically, 3 properties were sold at a price that roughly equates 1 year’s rent at a typical STAG property. Our guess is these particular properties were failing and this was an attempt to recover some of the value. Stuff like this happen frequently with REITs, but it is always disappointing when it does happen. Fortunately, these properties represent a very small portion of STAG’s portfolio and the rest of it greatly exceeded our expectations with unusually high retention rates and greatly positive roll-ups on renewal. Acquisition activity at STAG remains robust and accretive to FFO/share so we believe it will continue to grow and outperform industrial REIT peers.
Ashford Trust demonstrated operational superiority this quarter with RevPAR growth exceeding the industry and healthy margins that led to material FFO/share growth on a YoY basis. Such strength is atypical of REITs trading at less than 4X forward FFO so on a fundamental valuation basis AHT is better than most investments with a rare combination of rapid growth and deep value. While we continue to distrust management’s alignment, their actions have been within the range of reason. With a few more quarters like this, the stock could appreciate substantially.
Commentary may contain forward-looking statements which are by definition uncertain. We retain no obligation to update or correct forward-looking statements should the available information change. Actual results may differ materially from our forecasts or estimations.