5 Trends To Watch This Earnings Season

Jan. 21, 2020 11:00 AM ETABNB, PEAK, VTR, WE, PLD, SLG, ELS, MAA, ESS, DRE, BDN, KIM, CPT, AIV, NVR, CVCO, DHI, PHM, MDC, TMHC, CCS, WLH, TPH, TOL, LGIH, KBH, LEN, HD, LOW, PCH, MAC, LPT, KRC, ARE, SPG, RYN, PDM, HIW, CUZ, BPY, AVB, TRNO, OHI, OFC, MPW, ILPT, EGP, CBL, CTRE, Z, RDFN, RMAX, CLGX, RP, HOUS, SHW, LEG, MAS, WSO, MHK, OC, PPG, NLY, FRT, BRX, UDR, REXR, NNN, DEI, AAT, FR, UE, TCO, STAG, REG, PGRE, PEI, HR, EQIX, FCPT, EQC, CXW, AKR, WRE, WELL, VICI, SKT, MGP, INVH, HPP, GEO, DLR, CXP, BRG, IRM, NHI, CTT, VNO, SHO, ROIC, QTS, KRG, SUI, RPT, BX, O, LSI, HST, EXR, ESRT, CONE, SRC, PSA, PEB, LAMR, IRT, DRH, CUBE, VRE, AMH, ADC, COLD, WPC, STOR, SNR, SBRA, SBAC, LXP, CHCT, HT, AMT, WRI, RLJ, OUT, LTC, JBGS, INN, APTS, AHT, RHP, WSR, CSR, GNL, EPRT, DOC, CCI, PK, WPGGQ, CPLG, UNIT, UHT, DHC, UMH, GMRE, RVIC, PLYM, IIPR, VNQ, IYR, KBWY, SRET, XHB, ITB, PKB28 Comments72 Likes

Summary

  • Earnings season kicks off this week in the real estate sector. More than 150 REITs and 100 housing industry components will report 4Q19 earnings over the next six weeks.
  • REITs delivered their second-best year of the past decade in 2019 with total returns of nearly 30%, boosted by 'Goldilocks' economic conditions of low interest rates and solid economic growth.
  • Outside of the struggling retail REIT sectors, growth metrics have inflected higher for REITs over the past year after bottoming in 2017. Expectations are quite high for 4Q19.
  • The "REIT Rejuvenation" of 2019 has given these REITs the currency to re-open the acquisition pipeline which has historically been a primary driver of FFO growth.
  • Have mall REITs finally bottomed? Can the reacceleration in multifamily rent growth be sustained? We highlight the trends that we're watching this quarter for all real estate sectors.
  • This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Earnings Preview

Earnings season kicks off this week in the real estate sector. More than 150 REITs and 100 housing industry components will report 4Q19 earnings over the next six weeks. 'Goldilocks' economic conditions of low inflation, declining interest rates, and moderate economic growth powered a strong year for the commercial and residential real estate sectors, which bounced back after the worst year for REITs and builders since the financial crisis.

real estate investing

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

Real Estate Earnings Calendar

Below we compiled the notable earnings that we’re watching across the residential and commercial real estate sectors, which we will update throughout earnings season on our in our Real Estate Weekly Outlook.

real estate earnings calendar

(Source: Company Filings, Seeking Alpha)

What To Watch For in Residential Sectors

Apartments: Rent growth roared back to life in 2019, reaccelerating back to the highest level since 2016. Supply growth hasn't cooled nearly as much as expected, however, and low mortgage rates have pulled households on the margins into the ownership markets. Will this be the quarter the cracks finally begin to appear in the long-resilient multifamily sector? We're watching rent growth on new leases, turnover rates, and commentary on supply conditions.apartment REIT performance

Homebuilders: Homebuilders have picked up in 2020 exactly where they left off in 2019 with signs of continued reacceleration following a notable slowdown that dragged into mid-2019. Housing Starts climbed to the highest rate in 13 years in December as the NAHB's Traffic of Prospective Buyers Index rose to 20-year highs. The focus remains on net order growth and commentary on the entry-level. Builders that have reported so far have hit it out of the park.

Single-Family Rentals: For the "Renter Nation" generation, SFRs are the new "starter homes." Whether they’re renting or owning, the millennial generation will enter the single-family housing markets in full force in the 2020s. Investors shrugged off concerns over margin pressures last year, but improvement is needed to keep the momentum going. We're watching rent growth on existing leases and hoping to see expense growth under control. zillow rent growth

Manufactured Housing: The biggest beneficiaries of the lingering affordable housing shortage, MH REITs delivered a remarkable 7th straight year of outperformance in 2019. A slowdown in the transient segment was one area of concern last year as RV sales continue to slump. With blue-collar wage growth at cycle-highs, we're wondering if we'll eventually see any signs of softer demand for the traditionally counter-cyclical sector. So far, we haven't at all.

Storage: The glory days of double-digit annual rent growth are long gone after a commensurate boom in supply growth over the last half-decade. Symptomatic of the ongoing storage wars, marketing spending jumped nearly 60% from last year, pressuring SSNOI growth to essentially zero. Expectations remain quite low, and we're looking for signs of receding supply growth and hoping to finally see signs of an upward inflection in "street" rates in 4Q19.self-storage REIT fundamentals

Healthcare: The early tremors of the long-awaited demographic-driven demand boom are finally beginning to appear, but supply growth remains a major issue. After signs of stabilization, Ventas (VTR) and Healthpeak (PEAK) reported disappointing results in their SHOP segment last quarter. We're watching the SHOP segment closely to see 3Q19 weakness was a company-specific event or a sign that it was too early to call a bottom last year.

What To Watch For in Technology/Industrial Sectors

Data Center: Storm clouds have been building around the high-flying technology-focused sector as intense competition and furious supply growth have weakened pricing power in recent years. Hyperscale activity bounced back nicely in 2019, but CyrusOne's layoffs last week have raised questions about the cloud spending outlook for 2020. We expect more consolidation in 2020 and are focused on leasing activity and pricing trends. data center leasing

Cell Towers: The emergence of a fourth competitor as a precondition to the Sprint (S) and T-Mobile (TMUS) merger approval was an unexpected coup. Questions remain, however, about DISH’s viability as a national competitor. After another strong year in 2019, we're looking for commentary on the potential outcomes of the merger and an update on the status of 5G rollouts. We continue to see fixed wireless broadband as the most compelling catalyst. cell tower technology

Industrial: Riding the e-commerce wave, industrial REIT performance has been relentless over the past half-decade. Consumers increasingly demand speedy delivery, and retailers need industrial REITs to deliver it. With leasing spreads still seeing double-digit growth, Prologis sees robust 8-9% FFO growth through 2022. The sector continues to be 'priced for perfection,' as it has been for the last half-decade. So far, it has delivered 'perfection' and then some.industrial supply demand

What To Watch For in Retail Sectors

Malls: This holiday season was “make-or-break” time for low productivity malls in a fight for survival after 2019 broke another post-recession record for store closings. Consumers held up their end of the bargain as December retail sales recorded strong growth, but can it translate into improved performance from mall REITs, which have lagged the index for four straight years? We're watching for commentary on foot traffic, tenant sales, and leasing spreads.mall same-store NOI growth

Shopping Centers: Shopping center REIT NOI growth exceeded the REIT average for the first time in a decade in 3Q19 as open-air strip centers generally avoided the wave of store closings in 2019, which have been primarily concentrated in the enclosed mall-based category. Big-box retailers like Walmart (WMT), Target (TGT), and Costco (COST) are in the midst of a revival, but small-shop occupancy remains challenged.

retail sales december 2020

Net Lease: Net Lease REITs may be expensive, but perhaps that's a good thing. Utilizing "cheap" equity capital, these REITs have reasserted themselves as the external growth engines of REITs. AFFO and dividend growth look poised to turn decidedly positive in 2020 after a challenging two years. While net lease REITs have heavy retail exposure, it’s primarily the “right kind” of retail. We expect a big quarter of acquisitions and strong guidance for 2020. net lease REIT buying properties

What To Watch For in Office & Hotel Sectors

Office: Will WeWork's (WE) implosion be a problem for office REITs? While others saw co-working as a direct competitor for office REITs, we saw the rapid expansion of co-working as providing a much-needed demand tailwind, responsible for as much as half of total office leasing over the past half-decade in many markets. A slowdown in co-working leasing activity will be bad news for a sector that continues to deal with oversupply issues.

office REIETsHotels: Hotel REITs continue to be on the outside-looking-in, underperforming yet again in 2019 despite another solid year for the broader hotel industry as supply growth remains elevated. Hiding in the shadows of the WeWork drama has been a similar venture-capital-backed "real estate technology" company, Airbnb (AIRB), which is expected to go public this year. The much-feared recession was avoided, but is that enough to revive the sector in 2020?

What To Watch For in Specialty Sectors

Billboards: In the era of highly-personalized advertising, Out-of-Home (OOH) advertising remains an attractive and cost-effective medium for mass-market and local advertisers, immune from ad-blockers and fast-forwarding. We're watching closely for updates on the digital conversion upgrades and are interested to see if the acquisition pipeline opens in 2020, given the improved cost of capital enjoyed by these REITs after a strong 2019.

Prisons: You can't talk about the outlook for prison REITs without talking about politics. According to Politico, every serious Democratic candidate has called for the elimination of federal utilization of private prisons while two of the top three frontrunners (Warren, Sanders) have called for an outright ban of private prisons at all levels of government. With federal contracts totaling nearly half of revenues, forget fundamentals, it's going to be a wild year.

prison REIT tenants

Expectations Are High, Can REITs Deliver?

As discussed in our Real Estate Earnings Recap, after sliding from 2016 through 2018, REIT growth metrics have generally reaccelerated over the past several quarters, but the positive momentum paused in 3Q19. Reported by NAREIT on a TTM basis, the pullback in the third quarter was due primarily to weakness from the mall REIT sector over the last year, which recorded -0.2% same-store NOI growth in the quarter, the first time a major REIT sector has recorded negative NOI growth since 2011. For the overall REIT averages, after growing at the fastest rate since 2016 in 2Q19, FFO and dividends per share grew by 3.4% and 2.1%, respectively, in 3Q19 over the last twelve months. Same-store NOI growth retreated from a downwardly revised 2.4% in 2Q19 to 1.9% in 3Q19, but comparable metrics get easier over the next several quarters.

reits growth rate

REITs are beginning to get back to doing what they do best: utilizing their access to equity capital markets - one of their primary competitive advantages over private market peers - to accretively grow via external acquisitions. This valuation premium has allowed REITs to kick-start external growth, which has historically been responsible for more than half of FFO per share growth across the REIT sector since the dawn of the Modern REIT era in the early 1990s. REITs were net buyers again in 3Q19, buying $14.4 billion in assets while disposing of $9.6 billion. The $4.9 billion in net acquisitions was the largest quarterly "buy" since 1Q18, and we expect this trend to continue into 2020 given the favorable valuation environment.

REITs are no longer simply "buy-and-hold" real estate holding companies but have become dynamic real estate operators and developers over the past two decades. Before 2005, only a handful of REITs had in-house development teams, but that has changed significantly over the last decade, and a half as many large REITs are among the most active real estate developers in the country. Fueled by firm private market values, development yields remain attractive in many sectors, though these yields have shown signs of compression in recent quarters as costs rise and cap rates have trended sideways. The development pipeline remains near a record high at $46 billion, exceeding the 2008 peak of $38 billion. The industrial, residential, and office sectors have the most active pipelines, while development in the struggling retail sector remains modest.

reit development pipeline

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, Prisons, Billboards, Office, Storage, Timber, and Real Estate Crowdfunding.

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Disclosure: I am/we are long AMT, DLR, COR, PLD, PK, HST, TCO, SPG, NVR, DHI, PHM, MDC, MHO, MDC, TMHC, TPH, TOL, LEN, HD, LOW, Z, RDFN, RMAX, CLGX, RP, RLGY, SHW, LEG, MAS, WSO, MHK, OC, PPG. AVB, ESS, INVH, AMH, CPT, MAA, AIV, ELS, SUI, ACC, PEAK, VTR, WELL. 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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