Mergers And Earnings Lift REITs

Summary

• The U.S. equity market rally stalled this past week as intensifying COVID issues in India and domestic inflationary concerns offset a stellar slate of corporate earnings reports and economic data.
• The S&P 500 edged out gains of 0.1% - notching gains in five of the past six weeks - but the Mid-Cap 400 pulled back 0.7% and the Small-Cap 600 declined 0.5%.
• Real estate equities were among the leaders amid a frenetic week of M&A news and impressive earnings reports. The Equity REIT Index gained 1.3% with 16 of 19 property sectors in positive territory.
• The animal spirits are alive in REIT world. Realty Income announced that it will acquire Vereit in an all-stock deal to form a massive net lease REIT that will have a combined enterprise value of about $50B.
• "Beat and Boost" has been the theme of REIT earnings season. Residential and storage REITs have reported stellar results as robust housing demand and surging home values have reignited rent growth.
• This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

Photo by GCShutter/E+ via Getty Images

Real Estate Weekly Outlook

The U.S. equity markets rally stalled this past week as intensifying COVID issues in India and Brazil and domestic inflationary concerns offset a stellar slate of corporate earnings reports and economic data. Corporate earnings season remains on a record-setting pace with nearly 90% of companies beating EPS estimates while GDP data this week showed that the U.S. economy regained nearly all of the lost output from the pandemic.

(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)

The S&P 500 (SPY) edged out gains of 0.1% on the week - notching gains for the fifth week out of the last six - but the Mid-Cap 400 (MDY) pulled back by 0.7% and the Small-Cap 600 (SLY) declined by 0.5%. Real estate equities were among the leaders amid a frenetic week of M&A news and impressive earnings reports across most major property sectors. The broad-based Equity REIT Index (VNQ) gained 1.3% this week with 16 of 19 property sectors in positive territory while the Mortgage REIT Index (REM) gained 1.5%.

Having entered the pandemic with unmatched fiscal and monetary firepower, the U.S. is poised to emerge from the pandemic with a level of relative dominance unseen since the aftermath of WWII. While the U.S. economy is firing on all cylinders, the Eurozone officially descended into a "double-dip" recession this week following a fresh wave of lockdowns while other major economies face an even longer road to recovery. Stateside, the Energy (XLE) and Financials (XLF) sectors led the gains this week while homebuilders and the broader Hoya Capital Housing Index also rallied as the resilient housing industry continues to be a key source of U.S. economic strength.

Real Estate Economic Data

Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.

Personal Incomes surged by the most on record in March as the third wave of fiscal stimulus checks were deposited into bank accounts. Incomes jumped 21.1% from last month and 29.0% from last year, which has led to emerging pockets of inflationary pressures. Of note, residential real estate has historically been one of the most effective "inflation hedges" and boosted by this surge in incomes, all of the major home price indexes have indeed exhibited a reacceleration in price appreciation over the last year, underscored this past week by the 12.0% year-over-year increase in the Case Shiller National Home Price Index and 11.9% on the 20-City Composite in February, which was the strongest rate of price appreciation since March 2014.

We heard results from eight homebuilders this week which showed that builders continue to sell homes as fast than they can be built, underscored by the swelling backlog which reached record-highs of over 150,000 units last quarter. Century Communities (CCS) and M/I Homes (MHO) led the way this past week with gains of more than 12% each after both builders reported order growth of nearly 50%. Meritage Homes (MTH) jumped more than 13% on the week after significantly revising higher its full-year EPS outlook by a whopping 30% from $11 per share to $14.25 per share. PulteGroup (PHM) jumped nearly 10% after also boosting guidance to reflect expectations of a 30% jump in home closings from last year's record-setting pace.

Equity REIT Earnings Update

Real estate earnings season kicked into gear this week with results from nearly 60 equity REITs and 11 mortgage REITs. As foreshadowed last week in REIT Dividend Revival: Earnings Preview, "Beat and Boost" has been the theme of REIT earnings season thus far. Residential and storage REITs were the standouts this past week after reporting stellar results driven by robust housing demand and surging home values, which has reignited rent growth. Below, we discuss several of the highlights from this week.

Net Lease: The animal spirits are alive in the REIT world. Realty Income (O) announced that it will acquire Vereit (VER) in an all-stock deal to form a massive net lease REIT that will have a combined enterprise value of about $50B. As part of the deal, Realty Income plans to spin off VER's office properties into a new REIT. Vereit shareholders will get 0.705 shares of Realty Income per share of VER, equating to $48.29 per share, representing a 17% premium to VER's previous closing price. The merger is expected to close during Q4 2021 and the transactions are expected to add more than 10% to Realty Income's adjusted FFO per share in the first year.

Apartment: We heard results from eight apartment REITs so far which have been strong across the board with 6 of 8 boosting full-year FFO growth guidance. Led by Independence Realty (IRT) and NexPoint Residential (NXRT), sunbelt-focused REITs saw blended rental rates rise 3.2% in Q1, accelerating to 4.6% in April. Coastal-focused REITs including Equity Residential (EQR) and Essex Properties (ESS) are still seeing negative rent growth with blended rates declining -5.6% in Q1 but improving to -4.5% in April. Outside of the troubled urban metros, national apartment markets have been remarkably resilient throughout the pandemic as multifamily rent growth has started to "catch up" with the rapid rise in home prices.

Manufactured Housing: Riding the tailwinds of the affordable housing shortage, Sun Communities (SUI) gained 3.5% this week after reporting very strong results and boosting its 2021 Core FFO/share guidance once again. SUI now sees growth of 17.9% this year - up from its prior outlook of 15.3% - which would almost surely be among the best in the REIT sector. SUI also boosted its full-year same-store NOI growth outlook to 8.0% at the midpoint, up from its prior guidance of 6.1%, driven by an uptick in occupancy rates to record-high levels of 98.8% vs. 96.9% last year. Last week, Equity LifeStyle (ELS) reported similarly stellar results and boosted its full-year guidance for FFO growth to 9.7% - up from 6.5%.

Single Family Rental: The 'Burbs are back - and hotter than ever. Single-Family Rental REITs have been one of the top-performing property sectors over the past year amid a COVID-driven "suburban revival." Invitation Homes (INVH) jumped more than 3% this week after reporting that same-store NOI rose 4.4% year-over-year while occupancy rates climbed to fresh record highs at 98.4%, up 170 basis points from last year. Most importantly, rental rate growth remains very strong - and accelerating - as new lease rates rose by 7.9% and renewals rose by 4.4%, driving blended rent growth of 5.4%, up 200 basis points year over year. Revenue collections were approximately 98% of the Company's historical average collection rate. American Homes (AMH) reports results next Thursday.

Storage: Earlier this week in Storage REITs Urban Exodus Catalyzes Rebound, we discussed how the suburban housing boom and the desire for more space have driven a sharp rebound in self-storage demand. As anticipated, the trio of reports this week from Extra Space (EXR), Public Storage (PSA), and CubeSmart (CUBE) confirmed that the momentum continued into early 2021. EXR boosted its full-year Core FFO growth outlook to 14.1%, up from its prior outlook of 12.7%, and increased its same-store NOI growth outlook to 7.0%. CUBE also boosted guidance significantly across the board, and now sees same-store NOI growth of 4.8% and FFO growth of 6.4%, up from 4.7%. PSA initiated guidance for the first time and projects Core FFO growth of 8.9% this year powered by same-store NOI growth of 6.1%.

Data Center: Moving over to the tech sector, Digital Realty (DLR) rallied 3.5% this week after reporting strong Q1 results, salvaging what would have otherwise been a fairly lukewarm quarter for the data center REIT sector. DLR reported that it signed $117m in incremental annual rents in Q1, bringing the sector's total haul to $180m - down about 20% from last year's record quarter. CoreSite (COR) and CyrusOne (CONE) each finished lower after reporting disappointing leasing results and maintaining full-year AFFO guidance. QTS Realty (QTS) and Equinix (EQIX) each finished roughly flat after reporting in-line results. QTS boosted its AFFO growth guidance to 5.3% while EQIX maintained its outlook which calls for sector-leading growth of 9.1%.

Cell Tower: American Tower (AMT) finished higher by 0.3% after reporting another strong "beat-and-boost" quarter. The largest REIT by market capitalization boosting its full-year AFFO growth outlook to 9.0%, up from 8.4%. The company highlighted its recent acquisition of Telxius Towers - which it expects to be transformational for its European business - and the construction of nearly 2,000 new towers. SBA Communications (SBAC) gained 1.1% this past week after reporting similarly strong results and boosting full-year guidance. SBAC now expects full-year AFFO growth of 9.9%, up from 8.2% in the prior outlook. Together with Crown Castle (CCI), cell tower REITs now expect AFFO growth of 10.0% this year, an acceleration from its sector-leading growth rate of 8.6% last year.

Shopping Center: Moving over to the retail sector, we heard results from five shopping center REIT this past week - three of which boosted their full-year FFO guidance. Kimco (KIM) finished higher by 3.1% on the week after reporting that it collected 94% of rents in Q1 - up from 92% last quarter - and saw its same-store NOI growth improve sequentially to -5.7%. KIM - which announced a merger with Weingarten (WRI) earlier this month - also boosted its full-year FFO growth outlook to 6.0%, bouncing back from declines of -18.8% last year. Kite Realty (KRG) gained 1.3% after reporting that it collected 97% of rents in Q4 - above the sector average of 94% - while also reporting that its same-store NOI growth improved sequentially and boosted its full-year FFO growth outlook to 0.8%, a slight rebound after its -22.3% plunge last year.

Casino: We heard results from all 3 Casino REITs this past week with no major surprises as all three REITs continue to collect 100% of rents despite the continued depressed levels of activity at their properties. MGM Growth (MGP), for instance, reported that RevPAR at its Las Vegas hotels was down 62.7% year-over-year. VICI Properties (VICI) continues to be the strongest-performer with year-over-year AFFO/share growth of 23.7%, and it reiterated its guidance full-year which calls for AFFO/share growth of 12.5%.

Next week will be the busiest week of REIT earnings season with reports from nearly 100 REITs including Omega Healthcare (OHI) and Agree Realty (ADC) on Monday, Healthpeak (PEAK) and National Retail (NNN) on Tuesday, Tanger Outlets (SKT) and Spirit Realty (SRC) on Wednesday, STORE Capital (STOR) and Regency Centers (REG) on Thursday, and Ventas (VTR) on Friday. We'll have full coverage and instant analysis throughout the week in our Real Estate Daily Recaps.

Mortgage REITs

Mortgage REITs were mostly higher this week as residential mREITs rallied 2.1% while commercial mREITs gained by 0.4%. Eleven mREITs reported results this week with KKR Real Estate (KREF) leading the way, gaining more than 7% as the commercial mREIT has increasingly shifted its focus away from office and hotels and into the better-performing residential sectors. Redwood Trust (RWT) rallied more than 4% after reporting that its Book Value Per Share ("BVPS") jumped 8.5% in Q1 while Dynex Capital (DX) gained 3.5% after recording a roughly 4.3% gain in its BVPS. The two largest mREITs - Annaly Capital (NLY) and AGNC Investment (AGNC) - each gained about 2% after reporting BVPS gains of roughly 1% and 6%, respectively.

Elsewhere, Tremont Mortgage Trust (TRMT) - which reported this week that its BVPS rose 1.8% in Q1 - ended the week lower by about 2% after it announced that it will combine with RMR Mortgage Trust (RMRM) in an all-stock transaction that's intended to create a more diversified commercial mortgage REIT focused on middle-market transitional bridge loans. We'll hear results next week from 15 mortgage REITs including Invesco Mortgage (IVR), Two Harbors (TWO), Chimera Investment (CIM), MFA Financial (MFA), and New York Mortgage Trust (NYMT). Thus far, residential mREITs have reported an average increase in BVPS of about 3% this quarter while the reported BVPS for commercial mREITs has been flat.

REIT Preferreds & Bonds

The REIT Preferred ETF (PFFR) was flat this week and remains higher by 3.4% thus far in 2021. Mortgage REIT Lument Finance (LFT) announced this week the launch of a public offering of shares of its Series A Cumulative Redeemable Preferred Stock with a $25 par value. Before the name change from Hunt Companies in late 2020, the company previously had one preferred issue - an 8.75% Series A Cumulative Redeemable Preferred (HCFT.PA) that it redeemed in 2019. So far in 2021, REIT Preferred stocks are higher by 6.80% on a price return basis and the average REIT preferred currently pays a dividend yield of 6.28% and trades at a slight premium to par value.

2021 Performance Check-Up & 2020 Review

Through four months of 2021, Equity REITs are higher by 16.7% while Mortgage REITs have gained 15.7%. This compares with the 11.6% advance on the S&P 500 and the 18.3% gain on the S&P Mid-Cap 400. Eighteen of the nineteen REIT sectors are in positive territory for the year, while on the residential side, all eight sectors in the Hoya Capital Housing Index are higher. At 1.63%, the 10-year Treasury yield has climbed 71 basis points since the start of the year and is 111 basis points above its all-time closing low of 0.52% last August, but 163 basis points below its 2018-peak of 3.25%.

The FTSE NAREIT All Equity REIT Index ended 2020 with total returns of -5.12%. Despite the rough 2020, REITs have been one of the best-performing asset classes since the start of 2010, producing average annual total returns during this time of 11.1%. Interestingly, 2020 was the first year since 2009 that REITs finished in the bottom four of the ten major asset classes, and despite the pullback, still lag only the Small-Cap, Mid-Cap, and Large-Cap equities over this time. REITs have produced far superior total returns to Bonds (AGG), TIPS (TIP), Commodities (DJP), and International (EFA) stocks.

Economic Calendar In The Week Ahead

We have another frenetic week of earnings reports and economic data in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of nearly 1,000,000 in April following similarly-sized gains last month as temporarily unemployed workers return to the labor force. We'll also see Construction Spending data on Monday, and a flurry of Purchasing Managers' Index (PMI) data throughout the week.

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, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Cannabis, Real Estate Crowdfunding, High-Yield ETFs & CEFs, REIT Preferreds.

Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Index definitions and a complete list of holdings are available on our website.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s 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, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, 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.

Hoya Capital Real Estate ("Hoya Capital") is an SEC-registered investment advisory firm that provides investment management services to ETFs, individuals, and institutions, focusing on portfolio and index management of publicly traded securities in the residential and commercial real estate industries. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital's Seeking Alpha Profile Page. It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com. REIT Terms Defined: REIT (Real Estate Investment Trust): A company that owns, operates, or finances income-generating real estate. REITs must distribute 90% of taxable income to qualify. REITs are exempt from corporate income taxes, but distributions are generally taxed at ordinary (not qualified) income rates. FFO (Funds From Operations): A standardized measure of REIT operating performance, used in place of Earnings. FFO adds back depreciation to Net Income and adjusts for gains/losses on property sales. AFFO (Adjusted Funds From Operations): A non-standardized measure of recurring/normalized FFO after deducting capital improvement funding and adjusting for “straight line” rents. NOI (Net Operating Income): Typically reported on a “same-store” basis, NOI is a calculation used to analyze the property-level profitability of real estate portfolios. NOI equals all revenue from the property minus property expenses. NAV (Net Asset Value): An estimated market value of a REIT's net assets based on estimated private market valuations of similar assets, assuming immediate liquidity and zero transaction costs.

Comments

[albertciampi]

Great report. Thank you.