Who Paid The Rent? Earnings Halftime Report

Summary

• We're at the halfway point of the most newsworthy and consequential REIT earnings season in a decade. Rent collection and dividend plans have been the primary focus of investors.
• We've now tracked 33 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends in addition to the majority of mortgage REITs.
• What rent strikes? Rent collection has been largely a non-issue for residential REITs, who collected over 95% of April rents. Industrial, office, and healthcare rent collection have been similarly strong.
• For retailers, if you're not essential, you're not probably paying the rent. Shopping center and net lease REITs have collected only half of April rents, ranging from 15% to 97%.
• Not many fireworks so far. Real estate earnings results thus far have generally been better-than-expected. We break down rent collection statistics for every REIT that has reported thus far.
• This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Earnings Halftime Report

Did the rent get paid? We just passed the halfway point of what has shaped up to be the most newsworthy and consequential REIT earnings season in at least a decade. While it hasn't yet fully lived up to the "hype" that some critics were forecasting - which has generally been good news for REIT investors - earnings season has indeed provided pivotal information on rent collection and future dividend plans. In this Real Estate Earnings Halftime Report, we break down rent collection statistics for every REIT that has reported thus far.

(Hoya Capital Real Estate, Co-Produced with Brad Thomas)

Real estate earnings results thus far have generally been better-than-expected with rent collection proving to be largely a non-issue for essentially every property sector outside of retail REITs. Residential REITs have reported particularly strong results with apartments, single-family rental, and manufactured housing REITs combining to collect more than 95% of April rents. Industrial, self-storage, office, and healthcare rent collection have been similarly strong with rent collection coming in above 90% for these sectors so far. The same can't be said for retail REITs, however, as a shopping center and net lease REITs have collected only half of April rents while mall REITs begin reporting later this week. Results so far have been generally consistent with NAREIT's two published surveys in mid-April and early May.

We should note, however, that larger "blue-chip" REITs tend to report earlier in the earnings season, so the back-half of earnings season could indeed bring more fireworks as many of the smaller and more highly-levered names report over the next two weeks including the full slate of mall and hotel REITs. As anticipated, whether it's called a pause, a temporary suspension, or an outright cut, dividend reductions has been a major theme of REIT earnings season with some REITs appearing to "play it safe" with the expectation of paying a larger dividend later in the year, while other REITs have been left with little choice but to cut their distributions to preserve cash. We've now tracked 33 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends in addition to the majority of mortgage REITs.

As we've highlighted in various other reports including, REITs: This Time Is Different, most commercial equity REITs and housing-related companies entered the COVID-19 crisis on solid footing following a decade of conservative decision-making and prudent balance sheet management. That said, we're quickly finding out if any of the more highly levered small-cap REITs have been caught swimming naked as the tide went out. Below, we present a framework for analyzing each property sector based on their direct exposure to the anticipated COVID-19 effects as well as their general sensitivity to a potential recession and impact from lower interest rates. Within the COVID-19 sensitivity chart, we note that the vast majority of REITs to succumb to coronavirus dividend cuts have been in the "High" COVID-19 risk category.

While REITs have bounced back nearly 30% from their lows in late March, the broad-based Equity REIT ETFs remain lower by 25.1% in 2020 compared to the 11.7% decline on the S&P 500. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as data centers and cell tower REITs remain the lone real estate sectors in positive territory for the year, while industrial and residential REITs have also delivered notable outperformance. Naturally, the retail and hotel/lodging sectors remain the laggards on the year with declines of roughly 50%.

Rent Collection in the Residential Sectors

Apartments: Eight of the thirteen apartment REITs have reported earnings thus far and rent collection has averaged 96.4%. Mid-America (MAA) has led the way with 98% collection, followed by Equity Residential (EQR) and Bluerock Growth (BRG) at 97%. Student housing REIT American Campus (ACC), meanwhile, announced that it collected 93% of April rents. Only apartment REIT - small-cap Independence Realty (IRT) has announced a dividend cut. Housing is the ultimate "essential service" so it shouldn't be too much of a surprise that same-store NOI growth for the first quarter and rent growth on both renewals and new leases significantly beat expectations.

Single-Family & Manufactured Housing: Rent collection has been similarly strong in the "detached" residential rental sectors. Over the last two weeks, manufactured housing REITs Equity Lifestyle (ELS) and Sun Communities (SUI) had reported 97% April rent collection. Invitation Homes (INVH) announced on Wednesday that it collected over 95% of the historical average April rents and rent collection improved in May to over 100% of the pre-COVID-19 historical average through the first five days of the month and almost 109% of April's pace through day five. A post-coronavirus "suburban revival" would be an added tailwind for these REITs.

Healthcare: Despite being at "ground zero" of the coronavirus crisis, healthcare REITs have generally reported solid rent collection results with nearly 100% collection from life sciences and medical office properties. Even the already-troubled skilled nursing tenant operators are paying their rents so far with Sabra Health Care (SBRA) and Omega Healthcare (OHI) reporting 100% and 98% rent collection, respectively. Healthcare REITs with a large senior housing operating (SHOP) portfolio face more exposure to the coronavirus crisis, however, as Welltower (WELL) added their name to the list of dividend cuts on Wednesday which already included Sabra as well as Diversified Healthcare (DHC). SHOP-heavy REITs like New Senior (SNR) and Ventas (VTR) may well follow later this week.

Storage: Storage REITs were awfully quiet in March and April when most REITs were reporting interim rent collection updates, fueling speculation that metrics may be worst than anticipated. Fear not as Public Storage (PSA) reported last week that it collected 95% of April rent and that it "observed no material degradation in rent collections." Extra Space (EXR) announced on Wednesday that it collected 93% of rents in April compared to approximately 98% of rents for April 2019. Self-storage demand has proven to be incredibly "sticky" even during the depths of the prior Financial Crisis as rents are essentially "collateralized" by a renter's stored possessions.

Rent Collection in the Retail Sectors

Shopping Centers: For retailers, if you're not essential, you're not probably paying the rent. Unlike malls, the majority of shopping centers remain operational as "essential businesses" and shopping center REITs have collected most rent - 55% in total - from these operational tenants. Grocery-anchored-heavy REITs like Retail Opportunity (ROIC) have led the way with 70% rent collection while power-center-heavy REITs like Retail Value (RVI) have lagged with just 40% collection. Retail Properties of America (RPAI) added their name to the coronavirus dividend cut list this week, joining Urban Edge (UE), Whitestone (WSR), Cedar Realty (CDR), and the aforementioned Retail Opportunity and there's likely a handful more still on the way.

Net Lease: Investors have been quickly reminded that the net lease sector has heavy underlying exposure to the retail, restaurant, and experience-based categories, which have borne the brunt of the virus impact. Fireworks finally came on Wednesday when EPR Properties (EPR) announced that it collected just 15% of April rents and suspended their dividend, joining American Finance (AFIN) and Global Net Lease (GNL) on the dividend cut list. The "Power 3" reported mixed collection results as Realty Income (O) collected 83% of rents while Store Capital (STOR) collected 68% and National Retail (NNN) collected 52%. With the majority of net lease REITs having now reported, the sector has collected an average of 76% of April rent, significantly better than initial survey data from NAREIT which suggested closer to 50%.

Malls: Save the best for last? Only a single mall REIT - Taubman Centers (TCO.PK) - has reported thus far and TCO did not provide rent collection metrics. Initial survey data from NAREIT suggested that April rent collection may struggle to crack 20%. The sector got a boost last week when Simon Properties (SPG) reopen roughly 50 of its malls last weekend, but we expect some fireworks in the weeks ahead. Lower-productivity mall REITs like CBL & Associates (CBL) and Washington Prime (WPG) were already teetering on the edge even before the coronavirus crisis. All of the mall REIT sector besides Simon and Tanger Outlets (SKT) having already slashed their dividends,

Rent Collection in Industrial & Office Sectors

Industrial: April rent collection for industrial REITs has averaged 91.6%, which is a bit below their initial NAREIT survey data which showed over 98% collection. Sector stalwart Prologis (PLD) kicked off earnings season with 85% rent collection as of mid-April but provided encouraging commentary on the state of the high-flying industrial sector amid the pandemic. Leasing spreads haven't skipped a beat either with double-digit growth reported by most REITs as the "need for speed" in e-commerce distribution remains a substantial tailwind. Monmouth Industrial (MNR) is the clubhouse leader with 99% of April rents collected, followed by First Industrial (FR) and Duke Realty (DRE). No industrial REIT has announced dividend cuts so far.

Office: Despite the fact that many office buildings sit mostly vacant during the "work from home" era, rent collection has largely been a non-factor for office REIT landlords, at least among the large publicly-traded REITs. Rent collection has averaged 93% for office REITs which is slightly above the levels indicated in the NAREIT survey data. Equity Commonwealth (EQC) is the leader in the clubhouse with a 98% rent collection followed by Corporate Office (OFC) and Columbia Property (CXP). New York-focused Empire State Realty (ESRT) and SL Green (SLG) have reported the weakest rent collection of the group. Only one office REIT - small-cap City Office (CIO) - has cut dividends.

Technology Sector Performance

Cell Towers: One of two REIT sectors in positive territory this year, cell tower REIT earnings reports were generally solid and rent collection has never been a concern. American Tower (AMT) and SBA Communications (SBAC) reported another quarter of solid core results but both lowered guidance due entirely to negative expected impacts from foreign exchange currency adjustments. Crown Castle (CCI) reported similarly solid results and reaffirming 2020 guidance. AFFO per share growth is now expected to rise by 7.6% in 2020 which will almost surely be tops in the REIT sector.

Data Center: Results have been solid thus far for the best-performing REIT sector of 2020, particularly in closely-watched incremental annualized leasing revenue metrics. CyrusOne (CONE) reported $60 million incremental revenue in Q1 which was the best quarter since 2Q18 and was up from $13 million in Q4 and $27 million in the first quarter of last year. CoreSite Realty (COR) reported leasing activity of $12 million compared to $7 million in Q4 and $16 million in the Q1 of last year. QTS Realty (QTS) reported activity of $21.8 million in Q1 which was roughly in line with expectations. Together, these three averaged roughly 70% growth in leasing volumes from Q1 2020. If Thursday's results from Digital Realty's (DLR.PK) come in on-par with estimates, it would be the second-best quarter ever for net leasing activity.

Mortgage REIT Earnings Update

Residential mREITs: While not completely out of the woods yet, earnings results from residential mortgage REITs have indicated that mortgage market conditions have clearly stabilized over the last month following the period of violent volatility in March. Residential mREITs are still lower by 45.1% in 2020 but have rallied more than 40% from their early-April lows. 11 of the 24 residential mREITs have reported results thus far and reports have generally been better-than-expected. Book Value declines in the first quarter were driven primarily from losses on hedges and/or "forced selling" events rather than impairments to their underlying residential mortgage portfolio. BV declines either matched or were less than the interim updates provided by most mREITs last month with several REITs including AGNC Investment (AGNC) and Annaly Capital (NLY) reporting material increases in BVs since the end of the first quarter.

Commercial mREITs: While still early in the commercial mREIT earnings season with just 6 of the 17 REITs to have reported, results so far have been quite strong. Last week, Blackstone Mortgage (BXMT) and iStar (STAR) each reported that their estimated Book Value as of 3/31 declined only 3% since the start of the year while KKR Real Estate (KREF) reported a 5% decline. This week, Starwood Capital (STWD) reported that its BV declined just 5% last quarter while Ladder Capital (LADR) reported that its book value had declined by 8% in the quarter. All told, these were amazingly minimal declines considering each stock was down more than 50% YTD at their lows in early April. Commercial mREITs remain lower by 42.4% on the year, however.

Key Takeaways & Second Half Earnings Preview

Real estate earnings results thus far have generally been better-than-expected but while the fireworks may have been relatively few and far between so far, they may be coming over the next two weeks with more than 70 REITs left to report including the majority of the mall and hotel/lodging REIT sectors. Rent collection has been largely a non-issue for residential, industrial, and office REITs, as each sector has collected over 90% of April rents. For retailers, if you're not essential, you're not probably paying the rent. We'll continue to have real-time updates on the second-half of real estate earnings season in our Real Estate Daily Recap reports published every afternoon.

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, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Healthcare, Industrial, Data Center, Malls, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, and Real Estate Crowdfunding.

Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, AMH, SUI, CUBE, PSA, EXR, INVH, MAA, AIV, ESS, EQR, WELL, PEAK, VER. 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.