Melcor REIT Earnings October 31, 2018

The Melcor REIT released earnings after the close. The bad news is that adjusted Funds From Operations per unit were down 13% in Q3 and 8% year to date. Furthermore, the payout ratio as percent of this AFFO has risen to 105% in Q3 and 99% year to date. 

Now at least some of the Q3 decline would have been fully expected, and in part was due to the sale of two buildings where the funds have not yet been redeployed, but also partly due to 7% lower same-property net operating income. The decline in AFFO is arguably already “priced-in” with the units trading at 72% of book value and yielding 8.35%.

The occupancy rate is 90.3% and the company indicted good progress is leasing space.

As interest rates rise, all REITs are at risk for mark-to-market non-cash (but nevertheless real) losses in asset values. The REIT reported mark-to-market losses of $1.8 million. That seems quite minor in relation to assets of $721 million.

Based on this I would expect the parent Melcor Development Inc. to post only minor mark-to-market asset fair value losses in Q3 which in fact should be partly or even fully offset by sort of “sweat-equity” market value gains on two new restaurant buildings that were occupied in Q3 (unless the gains on these buildings have already been booked).

The Melcor REIT will host a conference call on Thursday morning at 11 am eastern.

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