REITs And Utilities Dive As Yields Jump



  • Waning worries on the trajectory of global economic growth sent US equity markets to another week of record highs and Treasury yields surging to four-month highs.
  • Good news is bad news for the long-outperforming defensive and yield-sensitive sectors, including real estate and utilities. REITs dipped more than 3% on the week.
  • Rates up, REITs down? The paradigm that bedeviled real estate investors for much of the past three years showed hints of an unwelcome return this week.
  • The high-flying homebuilders, which have become increasingly rate-sensitive over the past 18 months, dipped more than 5% while Zillow, Realogy, and Redfin surged double digits.
  • Real estate earnings season was generally better-than-expected with another quarter of strong results from the residential REITs. More than half of REITs raised full-year guidance.
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Real Estate Weekly Outlook

Reports that the US and China may be finally nearing an agreement on the long-awaited "Phase 1" of a trade deal propelled US equity markets to new all-time record highs, but also sent US Treasury yields surging to the highest levels since late July, with the 10-year yield jumping 20 basis points to close at 1.93%. With earnings season winding down and on a slow week of economic data, back-and-forth trade headlines dictated near-term sentiment as investors shunned the long-outperforming defensive and yield-sensitive equity sectors in favor of this year's relative laggards including the more economically-sensitive energy, financials, and materials sectors.

(Co-Produced with Brad Thomas through iREIT on Alpha)

Waning worries on the trajectory of global economic growth sent the SPDR S&P 500 ETF (SPY) higher by 0.9% while the Nasdaq ETF (QQQ) gained 1.2%. Rates up, REITs down? The paradigm that bedeviled real estate investors for much of the past three years showed hints of an unwelcome return this week. The broad-based Real Estate ETF (VNQ) dipped 3.3%, delivering its worst week since December 2018 and giving up its YTD outperformance relative to the major equity indexes. After breaching record highs in late October, REITs are lower by an average of 5% despite concluding a generally better-than-expected earnings season with more than half of the sector boosting guidance.

The Hoya Capital US Housing Index, the benchmark that tracks the performance of the US Housing Industry, finished the week lower by 1.8% as the high-flying homebuilders got dragged back down to earth by a number of bearish analysts calls, several of whom missed this year's nearly 50% rally. The headline of this week was the strong performance from the real estate technology and brokerage sector with Zillow (Z), Redfin (RDFN), and Realogy (RLGY) each jumping more than 10% on the week following a series of solid earnings reports. Zillow reported that traffic to mobile apps and websites hit an all-time high with monthly unique users up 5% to 195.6M, a decent leading indicator of future home buying activity.

As discussed, sector rotation was the story of this week in a "good news is bad news" theme for the more defensive and bond-like equity sectors including real estate and utilities. The financials (XLF), energy (XLE), and materials (XLB) sectors led this week's gains as crude oil prices gained nearly 3% on the week on a brightening outlook for global economic growth.

sector performance

Within the REIT sector, hotels were the lone real estate sector in positive territory on the week while the more yield-sensitive sectors were the laggards. The worst week of 2019 for the REIT sector hit a handful of names especially hard including Bluerock Residential Growth (BRG), Senior Housing Properties (SNH), CareTrust (CTRE), Preferred Apartment (APTS), Healthpeak (PEAK), and Digital Realty (DLR). On the upside, Host Hotels (HST) and Ryman Hospitality (RHP) were among this week's winners.

Real Estate Economic Data

Real Estate Earnings Recap

Real estate earnings season was generally better-than-expected with roughly 60% of REITs beating 3Q19 estimates while an impressive 50% of REITs raised full-year guidance. Residential REITs were again the standouts as the apartment, single-family rental, and manufactured housing REITs each reported a strong quarter of rent growth. Retail REITs also showed signs of stabilization amid an otherwise dire year of continued store closures. With a few stragglers reporting earnings next week, the final tallies aren't in quite yet, but 3Q19 looks to have continued the trend of accelerating same-store NOI growth across most REIT sectors. We'll have full coverage of earnings over the next few weeks within our REIT Rankings series.

real estate earnings

This week, we published our quarterly report on the Apartment REIT sector, Rent Control: The Dirtiest Words in Real Estate. Apartment REITs have delivered a strong 2019 as rent growth reaccelerated this summer to the highest rate since 2016. Occupancy remains near record-highs while turnover is at record-lows. All seven REITs are projecting same-store revenue growth within a 70-basis point spread of 3.0-3.7% with an average of 3.3%, up from the 2.6% rate achieved in 2018 and the 2.8% rate in 2017.

apartment rents

While demographic trends have been very favorable over the last decade, they will become a headwind by the end of the next decade. Almost 100% of the incremental growth in household formations have gone towards the ownership markets since 2017, but total household growth has kept the vacancy rate of rental households near historic lows. The strong jobs market powered the best year for household formations in a generation in 2018 with growth above 2.0%, and formations have averaged roughly 1.7% in 2019.

household formations

We also published our quarterly report on the data center REIT sector, Data Center REITs: Go Big or Go Home. The Big Get Bigger: Digital Realty shook the data center landscape yet again last week with its announced $8 billion acquisition of European data center giant Interxion. Responding to the mounting competitive threats posed by the hyperscale giants – Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL) – data center operators have turned to M&A to regain pricing power. Digital Realty, which we view as the industry bellwether, reported a strong 7.2% jump in cash renewal spreads, its strongest reading since 4Q15 and sharply higher than last quarter's -5.8% dip.

For all the focus on interconnection and future M&A possibilities, the performance of the data center REIT sector continues to be at the mercy of the quarterly net leasing activity figures - the most closely-watched metric for the sector. Data center leasing activity surged in the first-half of 2018, but dipped sharply into the end of the year, dragging with it the stock prices of these REITs. While still choppy, leasing has bounced back nicely in 2019, as have the REIT stock prices, and this past quarter's results were generally in line or slightly better the estimates. The $152 million in net incremental annualized revenues was a 27% jump from 3Q18, the first year-over-year increase in leasing in four center leasing

2019 Performance Recap

With this week's underperformance, the broad-based REIT ETFs have given up their YTD outperformance relative to the S&P 500, but remain higher by roughly 22% this year. The US Housing sector has climbed 28% this year with particularly strong performance from the single-family homebuilders, homebuilding products, and home furnishings sectors. At 1.93%, the 10-year yield has retreated by 75 basis points since the start of the year and is roughly 130 basis points below peak levels of 2018 around 3.25%.

Next Week's Economic Calendar

After this week's lull in the economic calendar, it will be a fairly busy week of inflation and retail sales data. CPI is released on Tuesday while PPI comes out on Thursday. Last month, inflation data came in cooler-than-expected. Housing costs continue to be the primary driver of what little overall inflation that there is. Consistent with earnings results from the apartment REITs and private-market data showing a reacceleration in rents since late 2018, at 3.5%, CPI:Shelter is within 20 basis points of multi-decade highs and at 3.8%. Retail sales data is released on Friday, as is Industrial Production.

If you enjoyed this report, be sure to "Follow" our page to stay up-to-date on the latest developments in the housing and commercial real estate sectors. For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Student Housing, Single-Family Rentals, Manufactured Housing, Cell Towers, Healthcare, Industrial, Data Center, Malls, Net Lease, Shopping Centers, Hotels, Office, Storage, Timber, and Real Estate Crowdfunding.

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Disclosure: I am/we are long RLGY, Z, RDFN, LEG, MHK, PGR, BAC, HBAN, MTB, TWO, DLR, EQIX, COR. 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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