(Hoya Capital Real Estate, Co-Produced with Colorado WMF)
REIT earnings season has provided critical information on the state of the real estate industry - a much-needed check-in given recent concerns over a potential "fourth wave" of the COVID pandemic and amplified restrictions on economic and social activity. Second quarter results were significantly better-than-expected with roughly 95% of equity REITs beating consensus FFO ("Funds From Operations") estimates while more than 75% of the REITs that provide forward guidance boosted their full-year outlook. While the quantity of guidance raises was historic, even more remarkable was the unprecedented magnitude of these upward revisions.
Nearly a dozen REITs boosted their full-year FFO growth outlook by more than 1,000 basis points from last quarter. For context, in a typical earnings season, an upward revision to FFO growth of 250 basis points or more would be considered a "significant" boost. Continuing a dramatic rebound, self-storage REITs led the charge in Q2 while residential REITs reported surging rents across the nation. Shopping center REITs reported their most impressive quarter in a decade. Just when mall, office, and hotel REITs were seeing daylight, however, amplified COVID restrictions threaten another dark winter, prompting a recent rotation back into "essential" property sectors.
Go Big or Go Home? The major trends that we discussed last week in our Earnings Halftime Report continued in the back-half of earnings season as the M&A "animal spirits" are as alive as ever across the real estate sector. Marking the seventh REIT-REIT consolidation that we've seen over the last four months, VICI Properties (VICI) - the largest casino REIT - announced plans this week to acquire MGM Growth Properties (MGP) to form one of the ten largest REITs with an enterprise value of nearly $50B. Earlier in earnings season, Kite Realty (KRG) and Retail Properties of America (RPAI) agreed to merge to become the fifth-largest shopping center REIT.
With real estate earnings season now essentially complete - sans a handful of stragglers that report results next week - we compiled the critical metrics across each real estate property sector and provide our "quick take" commentary from the second quarter.
Shopping Centers: (Final Grade: A) Who paid the rent? Shopping center REITs reported a near-complete normalization of rent collection in Q2, powering an impressive 19% surge in same-store Net Operating Income ("NOI") growth. All nine of the REITs that provide guidance raised their full-year results - many by a significant margin - with an average upward revision of 640 basis points. Positive standouts included Federal Realty (FRT) which reported a nearly 40% surge in its same-store NOI and raised its outlook by 980 bps along with Regency Centers (REG) which reported a 31% surge in same-store NOI and now expects full-year FFO to return to pre-pandemic levels - likely the first shopping center REIT to fully recover.
Net Lease: (Final Grade: B+) It's back to business as usual for net lease REITs, which reported that rent collection rates returned to pre-pandemic levels in Q2. Eight of the eleven REITs that provide guidance raised their full-year FFO growth outlook as more than half the sector now expects its 2021 FFO to be above pre-pandemic levels. Positive standouts included Spirit Realty (SRC), which reported collection of 99% of rents and raised its full-year FFO growth outlook by 580 bps to 10.8%. Realty Income (O) and National Retail (NNN) reported solid beat-and-raise results as well. EPR Properties (EPR) - which was among the hardest-hit REITs by the pandemic - introduced FFO guidance which called for a nearly 50% jump from last year but still nearly 50% below its pre-pandemic FFO.
Malls: (Final Grade: B-). The bleeding has stopped, for now. Sector stalwart Simon Property (SPG) reported a 17% surge in same-store NOI growth in Q2 and significantly raised its full-year FFO growth outlook to levels that would be just 10% below its 2019 FFO. Consistent with reports earlier in the week from Macerich (MAC), Tanger (SKT), and Pennsylvania REIT (PEI) occupancy rates appear to have stabilized and halted a multi-year downtrend, but these REITs cannot afford another "double-dip" back into COVID-related restrictions. While the occupancy stabilizing was certainly encouraging, the rental rates achieved on new and renewal leases continue to slide. SPG reported a comparable spread of -21.8% in Q2 - by far the worst quarter in the company's history.
Self-Storage: (Final Grade: A+) Boy, that escalated quickly. Catalyzed by the suburban housing boom and the desire for more space, self-storage demand has dramatically rebounded over the last twelve months, powering the most comprehensive "beat and raise" quarter for any REIT sector in recent memory. All five self-storage REITs raised their full-year FFO growth outlook by at least 500 basis points in Q2, led by CubeSmart (CUBE) and National Storage (NSA) which both posted upward revisions in excess of 1,000 basis points. Life Storage (LSI) has been the top-performer this earnings season after boosting its FFO growth outlook by 930 bps. All five storage REITs now expect double-digit same-store NOI growth this year.
Apartments: (Final Grade: A) Renters should prepare for an unwelcome surprise with their next renewal offer as rents are soaring across essentially all major multifamily markets across the country, particularly in the Sunbelt region. Led by Camden (CPT), Mid-America (MAA), and NexPoint Residential Trust (NXRT), sunbelt apartment REITs saw a continued acceleration in rent growth throughout Q2 and into early Q3 with several REITs reporting rental rate growth on new leases of 20% or more in July. Coastal markets have caught fire as well with AvalonBay (AVB), Essex (ESS), and Equity Residential (EQR) seeing mid-to-high single-digit rent growth this month with rental rates now approaching pre-pandemic levels for even the hardest-hit urban markets.
Single-Family Rentals: (Final Grade: A) Renters are unlikely to find relief from soaring rents in the SFR market as Invitation Homes (INVH) and American Homes (AMH) each reported double-digit rent growth on new leases in Q2 with signs of further acceleration into early Q3. INVH boosted its full-year FFO growth outlook by 180 bps and now sees AFFO growth of 14.8% this year, while also boosting its NOI outlook by 200 bps to 7.0%. Not to be outdone, AMH raised its FFO growth outlook by 430 bps to 13.8%, commenting that Q2 was "was one of the strongest operational performances in the history of the company."
Manufactured Housing: (Final Grade: A) The remarkable eight-year streak of outperforming the REIT Index appeared to be in jeopardy earlier this year for MH REITs, but stellar Q2 results now have the sector well-positioned to extend their streak into a ninth year. Equity LifeStyle (ELS) raised its full-year FFO outlook by 410 bps to 13.8% while also boosting its same-store NOI growth outlook to 7.9% at the midpoint. Sun Communities (SUI) somehow managed to top those impressive results by raising its full-year growth outlook by 610 bps to 24.0% and now sees double-digit NOI growth this year.
Healthcare: (Final Grade: B) The ten healthcare REITs that provide same-store NOI growth tell the story of the healthcare sector - stable performance in the MOB, SNF, and Hospital sub-sectors and strong performance in life sciences. Senior Housing REITs - the hardest-hit sub-sector - have led the recent recovery, however, as occupancy rates appear to have bottomed in early 2021, benefiting from the red-hot and undersupplied housing market. Welltower (WELL) noted continued signs of improvement in senior housing trends as occupancy rates increased 190 bps in Q2, exceeding its initial guidance of an approximate gain of 130bps. Two healthcare REITs boosted their full-year FFO guidance in Q2 - Healthpeak (PEAK) and CareTrust (CTRE) while lab space operator Alexandria Real Estate (ARE) continues to be a positive standout.
Data Center: (Final Grade: B-) The third-weakest-performing REIT sector this year, Q2 results were solid but unspectacular as all four REITs boosted their full-year revenue guidance while leasing results - the most closely watched earnings metric - were ultimately slightly stronger than expectations led by Digital Realty (DLR) and CyrusOne (CONE). Fundamentals were remarkably unaffected by the pandemic and while the average REIT reported an 18% plunge in FFO in 2020, data center REITs were one of the few sectors that saw positive growth last year with FFO rising 4.3% - almost exactly the same as from its pre-pandemic growth rate in 2019, and these REITs see another nearly-identical year of growth in 2021. Cell Towers: (Final Grade: B+) Similar to their technology REIT peers, a trio of "beat and raises" across the cell tower sector was shrugged off by investors as tower REITs continue to lag the broad-based index this year. American Tower (AMT) significantly boosted its full-year revenue growth guidance by 640 bps to 13.9% and its AFFO guidance by 260 bps to 11.6% citing accelerating growth in its international business. Crown Castle (CCI) boosted its FFO growth outlook by 70 basis points to a sector-leading 12.0%, but was pressured after cautioning that it's seeing a slower-than-expected pace of small-cell deployment in the U.S.
Industrial: (Final Grade: A-) The back-half of earnings season wasn't quite as strong as the first, but industrial REITs still delivered another strong quarter overall. Six of the seven REITs that provide full-year NOI and FFO guidance raised their outlooks as demand for industrial real estate space remains insatiable. Upside standouts included Rexford (REXR), which boosted its full-year FFO growth outlook by 530 bps to 13.3% and STAG Industrial (STAG) which boosts its FFO growth outlook by 370 bps. Cold storage operator Americold (COLD) reported disappointing results, however, citing lingering COVID-related impacts on global food supply chains and the global food supply chain continues to be impacted by the ongoing effects of COVID, especially "limitations on production due to disruptions and challenges in the labor market" that will "limit near-term performance."
Office: (Final Grade: B+) Work From Home Forever? A year into the pandemic, office utilization in major U.S. cities remains a fraction of pre-pandemic levels with coastal cities facing a particularly slow recovery as several major corporations have announced delays in their plans to return to the office. Office REIT results this quarter underscored the widening bifurcation between coastal urban REITs and office REITs focused on secondary and Sunbelt markets. Led by strong results from Cousins (CUZ), Highwoods (HIW), and Piedmont (PDM), 6 of the 7 that raised their full-year outlook were secondary/suburban-focused REITs.
Hotels: (Final Grade: B-) Two steps forward, one step back. Just when it appeared that the COVID pandemic well under control, a reacceleration in case counts across the global have threatened to reverse the hotel REIT recovery. Underscoring the fluidity of the recovery, REITs on the lower-end of the price spectrum - notably Apple Hospitality (APLE), Summit Hotel (INN) - reported occupancy rates that were back at pre-pandemic levels in Q2 while upscale hotels with more focus on business travel - including Pebblebrook (PEB), Host Hotels (HST), and Park Hotels (PK) are still reporting depressed occupancy rates below 50% as the sector is far from out-of-the-woods.
Casinos: (Final Grade: B+) Ready to roll the dice? The mega-merger between VICI Properties (VICI) and MGM Growth (MGP) - which will give the combined firm a dominate competitive position in the critical Vegas market - appears to be a win-win for both VICI and MGP. Despite their surprisingly steady performance throughout the pandemic, casino REITs have traded at persistent discounts relative to their net lease REIT peers - particularly MGP which was among the "cheapest" net lease REITs due in part to their single-tenant exposure with MGM Resorts (MGM). While not a complete game-changer for VICI - which operates as efficiently as any REIT from an overhead perspective and already expected to deliver double-digit growth AFFO growth for a second-straight year in 2021 - the move makes plenty of strategic and economic sense and should create meaningful shareholder value.
Homebuilders & Timber REITs
Homebuilders: (Final Grade: B+) While not a REIT sector, the better-than-expected results from the single-family homebuilders can't be overlooked either. The red-hot housing market has been the tide that has lifted many boats across the REIT sector as surging home values have been the catalyst behind soaring rent growth. Reports confirmed that because builders were already operating at or above maximum build capacity, the modest cooldown in home buying activity during the Spring and early Summer had limited impact on earnings results. Despite a cooldown in new orders, homebuilders still have 160,000 units in their backlog - 63% higher from the prior year.
Timber: (Final Grade: B+) The pure-play timber REITs - Rayonier (RYN) and CatchMark (CTT) have outpaced their vertically-oriented peers this year as soaring lumber prices and supply chain bottlenecks have tempered the previously red-hot demand for wood products. Rayonier - the lone timber REIT that provides full-year guidance - raised its EBITDA outlook higher by 380 bps to 15.8% citing "continued momentum across our businesses and a markedly improved operating environment." PotlatchDeltic (PCH) and Weyerhaeuser (WY) both reported record-high adjusted EBITDA in Q2, but are well positioned to benefit from an expected rebound in discretionary home repair and remodeling activity in the back-half of 2021.
Billboard: (Final Grade: A-) Lamar Advertising (LAMR) reported improving results and boosted its full-year AFFO growth outlook to 21.4%, up from its prior outlook of 7.7%. Lamar noted that billboard revenue for the period surpassed revenue for the comparable quarter in 2019, while bookings in the transit and airport business continued to improve. Outfront (OUT) - which owns a more public-transit-heavy billboard portfolio - reported signs of rapid improvement as well but did not provide full-year guidance. OUT commented that its "business is recovering more quickly than we expected, with AFFO returning solidly to positive". OUT announced plans to resume its dividend in Q3 while LAMR plans to boost its dividend above its pre-pandemic rate.
Prisons: (Final Grade: B) GEO Group (GEO) surged after reporting better-than-expected Q2 results and raising its full-year FFO outlook. Remarkably, GEO now sees its AFFO rising by 1.2% this year versus its initial 2021 guidance which called for a decline of -19.1%. GEO did not comment on the status of its corporate structure evaluation on whether it will continue to operate as a REIT or transition to a C-corp. Along with fellow prison operator CoreCivic (CXW) - which reports results next week - prison operators have rebounded in recent months as the Biden agenda - and hopes for a repeat of its 2020 electoral performance in 2022 - has sputtered amid concerns over COVID and inflation.
REIT earnings season has provided critical information on the state of the real estate industry - a much-needed check-in amid fears of a potential "fourth wave" of the COVID pandemic. Results were significantly better-than-expected with roughly 95% of equity REITs beating consensus FFO estimates while more than 75% of the REITs that provide forward guidance boosted their full-year outlook. Positive surprises were seen across the residential sectors as self-storage, manufactured housing, single-family, and multifamily REITs saw accelerating rent growth even in the hardest-hit urban markets.
More remarkable was the unprecedented magnitude of these upward revisions. More than a dozen REITs boosted their full-year FFO growth outlook by more than 1,000 basis points from last quarter. However, it may be too soon to declare victory for the mall, office, and hotel REIT sectors as amplified COVID restrictions threaten to reverse hard-fought gains and spark a rotation back into the "essential" property sectors - notably housing, technology, and logistics - that led throughout the pandemic.
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, 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.
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Disclosure: I/we have a beneficial long position in the shares of 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 either through stock ownership, options, or other derivatives. 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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