Disappointing Earnings Just Trashed These 3 REITs: What Should Investors Do?

It's always risky for an investor to buy or sell shares of a stock right before an earnings report because nobody can predict with 100% accuracy how a company will perform, nor is it possible to gauge how Wall Street will react to the news.

When a company misses the earnings estimate, sometimes it gets shrugged off if the revenue beats the estimates. Other times the earnings may beat the estimates, but the revenue falls short of expectations and that precipitates a sell-off in share price. Another factor is whether the stock appears overbought or oversold. An overbought stock is priced to perfection and an earnings miss will trigger much more selling than if the stock is already beaten down in price.

Investors must decide whether to continue holding the stock after an earnings disappointment or sell quickly before any further decline occurs. It usually pays not to panic sell because often the initial Wall Street overreaction is followed by a price bounce back and investors can then sell at a better price or continue holding if they have faith in the company's ability to perform better in the future.

Alternatively, a significant price decrease can present an opportunity for investors who have patiently waited for a more favorable price point to acquire shares of the stock. But prospective buyers also need to weigh the potential risks versus the rewards — will the earnings disappointment initiate further downside or instead provide a short window of opportunity to invest in a stock at a lower price and higher dividend yield?

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Take a look at three real estate investment trusts (REITs) that just got clobbered by Wall Street after disappointing with second-quarter operating results.

Medical Properties Trust Inc. MPW is a Birmingham, Alabama-based healthcare REIT that owns and operates 444 general acute care and other properties across the U.S. and nine other countries, with locations in Europe and Australia. It has a portfolio valued at $19.2 billion. Acute care hospitals account for 64% of its portfolio, and about two-thirds of its properties are in the United States.

In July, Medical Properties Trust sold three general acute care hospitals in Kansas and Texas for approximately $100 million.

On Aug. 8, Medical Properties Trust reported its second-quarter operating results. Funds from operations (FFO) of $0.48 missed estimates of $0.70, although it was an increase of 4.35% from funds from operations (FFO) of $0.46 in the second quarter of 2022. Revenue of $337.39 million also missed the estimates of $351.38 million and was 15.7% below revenue of $400.23 million in the second quarter of 2022. 

Medical Properties Trust also reported a net loss of $42 million, versus net income of $190 million a year ago, because of the early termination of five Utah hospital leases and a straight-line rent write-off of $95 million.

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Medical Properties Trust performed well over the past three months, climbing from just below $7 per share to a recent high of $10.74. But after the earnings came out, Medical Properties Trust shares dropped over 14% in one day, closing at $8.68.  

Healthcare Realty Trust Inc. HR is a Nashville, Tennessee-based healthcare REIT that owns and develops outpatient medical facilities across the U.S. It was formed by a merger between Healthcare Realty and Healthcare Trust of America in July 2022. The merger created a company that now has 42 million square feet in 714 properties across 35 states. Eighty-five percent of Healthcare Realty's properties are in larger cities such as Atlanta, Boston, Dallas, Houston and Los Angeles.

On Aug. 7, shares of Healthcare Realty Trust closed at $19.73. The next morning, earnings were announced before the opening bell. FFO of $0.39 per share missed estimates of $0.40 and was 13.33% below FFO of $0.45 per share in the second quarter of 2022. Revenue of $338.14 million beat the consensus estimate of $333.6 million by 1.36% and was a 132.68% increase over revenue of $145.33 million in the second quarter of 2022.

The stock opened lower at $19.26 and sank to $18.39, before closing at $18.50, a 6.23% drop, courtesy of a disappointed Wall Street.

Healthcare Realty pays a quarterly dividend of $0.31 per share and the annual dividend of $1.38 now yields 7.45%. 

Extra Space Storage Inc. EXR is a Salt Lake City-based self-storage REIT with over 3,500 properties comprising 270 million square feet of rentable storage space across 43 states and Washington, D.C. Extra Space Storage acquired Life Storage Inc. LSI in a deal that closed during July and considerably boosted its portfolio.

On Aug. 3, Extra Space Storage reported its second-quarter operating results. FFO of $2.06 missed the Street estimate of $2.15 and was also below its FFO of $2.13 in the second quarter of 2022. Revenue of $440.75 million missed the estimate of $450.93 million but was an 8.01% increase over revenue of $408.04 million in the second quarter of 2022.

The share price had been falling for two weeks on concerns of lower storage unit rents but seemed to stabilize after the closing bell on the day that earnings were announced. Perhaps investors were feeling optimistic because the stock was already oversold. Extra Space Storage closed that day at $139.45.

Shares dropped to a low of $123.67 the day after earnings were announced and closed down 9.8% at $125.70. The stock has since rebounded to a recent closing price of $128.85.

But one investor's loss can often be another investor's gain, and Extra Space Storage is now close to 40% below its price in January 2022. Investors may want to watch this stock closely.

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