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Real Estate Rally Continues After Impressive Earnings



  • Following their best week since 2016, REITs jumped another 2% this week as earnings continue to beat expectations. Roughly 95% of REITs raised or maintained 2018 guidance.
  • Industrial, hotel, and retail REITs have been the winners of this earnings season. Fundamentals appear to have finally bottomed in the beleaguered retail space after a brutal 2017.
  • Job growth has accelerated since mid-2017, reversing a multi-year slowdown attributable to tightening labor market conditions. Deregulation and corporate tax reform appear to have added another leg to the recovery.
  • Wage growth has been more moderate than expected even as the unemployment rate dipped below 4.0%. Nearly 20 million prime-working aged Americans remain on the sidelines, a source of continued slack.
  • While overall inflation remains moderate, pockets of inflation have emerged in recent years. Construction costs are expected to rise more than 5% in 2018, adding to the slowdown in construction activity.

Real Estate Weekly Review

real estate weekly review

Following their best week since 2016, the real estate ETFs (VNQ and IYR) climbed another 2% this week and homebuilders (XHB) climbed 0.7%, both outperforming performance of the S&P 500 (SPY). Strong earnings across the REIT and homebuilder sectors have alleviated many concerns over interest rate sensitivity and moderating fundamentals. Roughly 95% of REITs raised or maintained 2018 guidance and homebuilder earnings were similarly strong.

real estate weekly performance

(Hoya Capital Real Estate, Performance as of 3 pm Friday)

Across other areas of the real estate sector, mortgage REITs (REM) jumped more than 3% as the 10-Year yield finished the week unchanged. International real estate (VNQI) declined modestly. In the commodity and currency space, crude oil (USO) jumped more than 2% on the week, offset by a 2% decline in natural gas (UNG) while the US dollar (USDU) jumped more than 1%.

Real Estate Earnings Update

Earnings misses and downward revisions to guidance were a prevalent issue across the real estate sector in 2017. REITs that missed estimates were punished by investors, impairing their cost of capital and adding further operational challenges to their business. Entering 2018, REITs were reluctant to make the same mistake again, reflected in very conservative guidance provided at the end of last year.

So far in 1Q18 earnings season, REITs have easily surpassed this conservative guidance. With more than three-fourths of the sector having reported earnings, nearly 60% of REITs beat FFO estimates while just 7% came in short. More impressive was the 40% of REITs that raised full-year guidance with just 2 REITs lowering 2018 expectations. Industrial, hotel, storage, and retail REITs have been the winners this earnings season.

real estate earnings

Retail REITs continue to be the standouts with solid results from Federal Realty (FRT), Acadia (AKR), Regency (REG), and retail-focused

This article was written by

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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. 

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Analyst’s Disclosure: I am/we are long VNQ, SPY, MAA, CPT, OHI, PLD, GGP, STOR, SHO, SUI, ELS, ACC, EDR, DLR, COR, REG, CUBE, PSA, EXR, BXP, EQR, INVH, SPG, HST, TCO, AMT, SBRA, AMZN. 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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