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REIT Earnings Recap: Cycle Enters Late Innings



  • Earnings season concluded last week in the real estate sector. Overall, 4Q17 results were slightly better than expected (80% beat or met estimates), but REITs raised caution heading into 2018.
  • As supply growth has intensified, fundamentals continue to moderate across the real estate sector as rental markets approach supply/demand equilibrium after nearly a decade of above-trend rent growth.
  • Same-store NOI grew 2.6% in 2017, the slowest rate of growth since 2011. Occupancy levels remain near record highs, however, as real estate demand growth continues to be robust.
  • Justified or not, REITs continue to be pressured by rising interest rates. Private real estate values remain firm, which has created a wide NAV discount, making external growth more difficult.
  • REIT balance sheets have never been healthier and better prepared to deal with rising rates. We analyze newly released data from NAREIT’s 4Q17 T-Tracker.

Real Estate Earnings Review

Amid the interest rate-driven volatility in the real estate markets, it's easy to lose sight of the underlying real estate fundamentals, which remain healthier than the 15%+ recent decline in REIT valuations would otherwise suggest. In this report, we look past recent price movements and analyze the recently released NAREIT T-Tracker data to review 4Q17 earnings from a purely fundamentals perspective.

real estate earnings recap

The post-recession period was particularly favorable for real estate owners. Until recent years, demand growth significantly outpaced supply growth, as development activity was stymied by tight credit conditions, limited risk appetite, rising construction costs, and burdensome financial and zoning regulations. This disequilibrium resulted in tight rental markets, allowing REITs to realize robust rent growth - more than double the rate of inflation - for most of this decade.

A Battle Between Supply And Demand

Spurred by development yields that were too attractive to pass up, construction activity has picked up considerably since 2015, and supply growth has approached nearly 2% of existing inventory across most major sectors. As supply growth has intensified, fundamentals have moderated across the real estate sector as rental markets approach supply/demand equilibrium after nearly a decade of above-trend rent growth. Same-store NOI grew 2.6% in 2017, the slowest rate of growth since 2011.

Demand, however, is certainly not the issue. Occupancy rates remain near record highs and have shown no sign of retreating. At 93.8%, average REIT occupancy reached a new record in 4Q17, led by new all-time highs in the industrial and apartment sectors. Despite the gloom-and-doom narrative surrounding the retail sector, retail REITs remain nearly 96% occupied.

Perhaps the best indication of the robust supply growth (and continued supply overhang) in the real estate sectors comes from the REITs themselves. The REIT development pipeline has exploded in size since bottoming in 2011

This article was written by

Hoya Capital profile picture

Real Estate  • High Yield • Dividend Growth

Visit www.HoyaCapital.com for more information and important disclosures. Hoya Capital Research is an affiliate of Hoya Capital Real Estate ("Hoya Capital"), a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. 

Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. 

Collaborating with ETF Monkey, Retired Investor, Gen Alpha, Alex MansourThe Sunday Investor, and Philip Eric Jones for Marketplace service - Hoya Capital Income Builder. 

Hoya Capital Real Estate ("Hoya Capital") is a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations is an affiliate that provides non-advisory services including research and index administration focused on publicly traded securities in the real estate industry.

This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.

Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

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Analyst’s Disclosure: I am/we are long VNQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

Vandooman profile picture
Usual good article. Adds some interesting perspectives. Thanks.
Hoya Capital profile picture
Thanks for the comment, Vandooman.
edinvestor1 profile picture
Would you please consider changing from a red/green color scheme on charts. That is the most common color blindness and I cannot read your charts which use this. Thanks in advance.
Hoya Capital profile picture
I'll keep that in mind and label lines directly whenever possible.
David Jensen, CFA profile picture
Nice review. Thanks !
Hoya Capital profile picture
Thank you, David.
Looking forward to the healthcare REIT update.
Hoya Capital profile picture
Working on it for next week.
Granicus007 profile picture
always good analysis!
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