- Prologis reported top and bottom line beat but the weak outlook caused the stock to sell off.
- Crown Castle had a mixed quarter as REIT missed on funds from operations and the outlook was decent.
- Vici Properties had a mixed quarter in a transaction-filled quarter as they look to expand.
- Realty Income reported a beat and raise quarter in an outstanding showing from management.
- Innovative Industrial Properties reported a top and bottom-line beat and showed that they have a good tenant base to weather a recession in 2023.
The real estate investment trust sector had a mixed quarter overall as the sector was sold off as investors put money into risk-free bonds earning higher yields. For the first time in a while, high-yielding sectors like Utilities and REITs face competition from the bond market as investors now have alternatives outside of the stock market. The positions that represent the REIT sector in our portfolio include Prologis (PLD), Crown Castle Inc. (CCI), Vici Properties (VICI), Realty Income Corp. (O), and Innovative Industrial Properties (IIPR).
Prologis (PLD): The industrial property real estate investment trust reported funds from operations of $1.73/share (beat WallStreet estimates by $0.06) and revenue of $1.75 billion (beat WallStreet estimates by $620 million). In comparison to our fund estimates, this was a fairly in-line quarter from Prologis where we estimated the company would have funds from operations of $1.72/share on revenue of $1.73 billion. Prologis reported revenue growth of 48.8% all thanks to the company’s acquisition of Duke Realty which closed out earlier in 2022. Rents were up 38.5% as the company passed on costs to tenants (signs of the presence of inflation).
Prologis issued $3 billion of debt to fund its acquisition and this comprised $1.2 billion worth of green bonds aimed at attracting ESG capital investments. Management was somewhat cautious when it came to reaffirming FY22 guidance. Net earnings were reduced by 18% and the core operational funds from operations were reduced by 60 basis points. However, management expects strong occupancy and higher capital deployment and to put cash to use in capital acquisitions. Investors did not like the weak guidance and the stock was sold off in reaction to the news. We have not added to our position recently and if the stock starts to yield 3.5% we will add to our position.
Crown Castle (CCI): The operator and owner of cell towers reported adjusted funds from operations of $1.85/share (missed WallStreet estimates by $0.06) and revenue of $1.75 billion (beat WallStreet estimates by $20 million). Crown Castle reported revenue of 8% growth and this was driven by a 5.3% billing increase along with 3.3% tenant renewals. Operating income was up 19% from the quarter as these cell towers are not high maintenance once they have been put up. Management is still investing heavily in its 5G build-out with its fiber & tower property expansion spending $337 million during the quarter.
Crown Castle returned $637 million back to shareholders in the form of dividends and management increased its dividend payout by 6.5%. Management provided a good outlook for the fiscal year 2023 as they look to strategize and weather economic headwinds coming. Management does expect between $120-$160 million in additional expenses from higher interest rates. Looking at the outlook in detail, Crown Castle expects a 4% rental site revenue growth along with a decrease in operating income of 3% from higher costs. The FFO growth was modest at 4% which is good for a recessionary year.
Vici Properties (VICI): The resort owner and operator reported funds from operations of $0.49/share (missed WallStreet estimates by $0.08) and revenue of $751.5 million (beat WallStreet estimates by $13.27 million). In comparison to our fund estimates, we expected Vici Properties to generate $0.53/share in funds from operations on revenue of $750 million. So Vici’s earnings came in line with our expectations and funds from operations came in lighter than expected due to M&A transactions. Vici Properties announced the acquisition of Rocky Gap Resort for $204 million and expanded a partnership with another resort for $180 million.
Vici’s revenue doubled to $751.5 million as a result of the closed transaction from MGM Growth Properties for $126.4 million. Subsequent to the quarter ending on October 7, 2022, Vici Properties acquired a ranch for $200 million with a purchase option in the future. The REIT has $4.7 billion worth of liquidity for capital expenditures and M&A as management looks to capitalize in FY2023. Management announced an 8.3% dividend increase and paid out $375.6 million during the quarter. The stock was sold off and we will have been using it as an opportunity to add to our position since this is a fairly new position.
Realty Income Corp. (O): The commercial property REIT owner reported funds from operations of $0.98/share (beat WallStreet estimates by $0.01) and revenue of $837.3 million (beat WallStreet estimates by $27.03 million). Realty Income’s funds from operations came in light of expectations but beat on revenue. We estimated the REIT would earn $1.02/share and generate $835 million in revenue. Realty Income reported strong occupancy at 98% coupled with 70% revenue growth as virtually all of the company’s properties we re-leased by tenants. The company’s high revenue growth is also because of an acquisition closing and being integrated into the books.
Management seems to be executing well and maintaining costs well as funds from operations rose 9% for the year. Management is expanding its business well as it spent $1.87 billion on capital investments with a special focus on Europe (taking advantage of depressed property prices). To finance this expansion, Realty Income raised $700 million by selling additional stock. Management raised its dividend payout by 5% as the company continues to pay a monthly dividend. The company has close to $7.5 billion in liquidity on the balance sheet which is more than enough for management to work with. Management raised guidance on the funds from operations which means they are looking to rein in expenses in Q4. We like the stock’s defensive attributes and its great dividend yield of 4.72%(as of the close of the market on November 4, 2022).
Innovative Industrial Properties (IIPR): The REIT that specializes in cannabis commercial properties and warehouses reported adjusted funds from operations of $1.97/share (beat WallStreet estimates by $0.08) and revenue of $70.9 million (beat WallStreet estimates by $2.47 million). In comparison to our fund estimates, Innovative Industrial Properties reported an in-line quarter where we expected the company to report funds from operations of $1.95/share on $71.2 million in revenue. The company reported steady revenue growth of 32% coupled with a strong property portfolio of 111 properties in 19 states. Management reported due to the toughening economic conditions $5.7 million was not collected from tenants and management is working out something with these indebted clients.
Despite the uncollected rental income, Innovative Industrial Properties still has enough cash flow to acquire a Massachusetts industrial property for $21.5 million (a tenant already lined up in Curaleaf Holding). The company also sold a property for $23.5 million. Looking at the state of the balance sheet, the REIT has enough liquidity to weather a recession in 2023 as they have no secured debt on the books. In addition to the no secured debt, the company has healthy debt service coverage at 15.6 times. Management increased its dividend payout by 25% and they stay on track to pay $7.20/share per year. This was a good quarter for Innovative Industrial Properties despite the non-collected rent. We will continue to monitor the REIT’s tenants' financial health because it will be important to estimate the company’s revenue numbers.
Disclosure: Cresco Investments is long Prologis (PLD), Crown Castle Inc. (CCI), Vici Properties (VICI), Realty Income Corp. (O), and Innovative Industrial Properties (IIPR).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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