REITs Rally | Timber On Fire | Earnings Heat Up

Summary

• U.S. equity markets finished higher Monday ahead of a frenetic slate of earnings results as positive vaccine news and clarity on the details of the stimulus package outweighed coronavirus concerns.
• Following a decline of 0.3% last week, the S&P 500 finished higher by 0.7% today while the Dow Jones Industrial Average climbed 115 points and the tech-heavy Nasdaq jumped 1.7%.
• Following declines of 0.7% last week, the Equity REIT ETF finished higher by 1.0% today with 15 of 18 property sectors in positive territory ahead of a busy week of earnings.
• Homebuilders and the broader housing sector delivered another strong day as the steadfast strength of the U.S. housing market continues to provide a steady foundation for the global equity market rally.
• Four REITs reported results after the bell today. Residential mREIT AGNC Mortgage reported an above-consensus 9.5% jump in tangible book value while data center REIT QTS Realty reported decent leasing results.

Real Estate Daily Recap

Our Real Estate Daily Recap discusses the notable news and events in the real estate sector over the last trading day and highlights sector-by-sector performance. We publish this note every afternoon at HoyaCapital.com and occasionally for free on our Blog to cover significant news and events. Subscribe to our free mailing list to make sure you never miss the latest developments in the commercial and residential real estate sectors. You can also follow our real-time commentary on Twitter and LinkedIn.

U.S. equity markets finished higher Monday ahead of a frenetic slate of earnings results as positive vaccine news and clarity on the details of the stimulus package outweighed coronavirus concerns. Following a decline of 0.3% last week, the S&P 500 ETF (SPY) finished higher by 0.7% today while the Dow Jones Industrial Average (DJI) climbed 115 points and the tech-heavy Nasdaq 100 (QQQ) jumped nearly 2%. After declining by 0.7% last week, the broad-based Equity REIT ETF (VNQ) finished higher by 1.0% today with 15 of 18 property sectors in positive territory ahead of a busy slate of earnings this week. The Mortgage REIT ETF (REM), meanwhile, gained 0.7% today following last week's flat performance.

As discussed in our Real Estate Weekly Outlook, equity markets continue to be supported by unprecedented levels of fiscal and monetary support as investors await the final details of the next round of stimulus which is expected to include another round of direct payments and an extension of the enhanced unemployment benefits with modifications to reduce disincentives to work. The steadfast strength of the U.S. housing market - perhaps the most economically-important asset class in the world - has seemingly held the fragile pieces of the global economy together. Nine of the eleven GICS equity sectors finished higher today, led by Technology (XLK) and Materials (XLB) while Homebuilders and the broader Hoya Capital Housing Index delivered another strong day ahead results from DR Horton (DHI) tomorrow morning.

Commercial Equity REITs

REIT earnings season has officially begun and will hit high-gear this week with six dozen equity REITs and a dozen mortgage REITs reporting results.  Last week, we published Dividend Cuts And Overdue Rent: Previewing Earnings Season. We compiled the notable earnings that we’re watching across the residential and commercial real estate sectors. We will provide real-time commentary throughout earnings season and track rent collection and dividend cuts and resumptions in our all-new iREIT Earnings Headquarters tool on iREIT on Alpha.

Data center REIT QTS Realty (QTS) is trading slightly lower in the after-hours session after reporting results after the bell. QTS reported $21 million in new and modified renewal leases during the second quarter of 2020. This compares to $22 million last quarter and 20 million in 2Q19. As we discussed in Data Center REITs: The New Digital Office, leasing activity - the most closely-watched earnings metric - surged in the first quarter to the highest level since mid-2018 as the sector continues to ride substantial secular tailwinds.

Timber REIT PotlatchDeltic Corporation (PCH) rallied nearly 4% today ahead of reporting results this afternoon. PCH reported earnings above consensus estimates and commented that "lumber markets are in the midst of a historic run. Driven by the sharp rebound in housing market activity over the last quarter, timber REITs including Weyerhaeuser (WY), Rayonier (RYN), CatchMark Timber (CTT), and the aforementioned PCH have been the best-performing equity REIT sector. Lumber prices have roughly doubled from their lows in early April, driving an improvement in revenues and margins at the largest timberland owners and lumber producers in the country.

Also on the earnings calendar this afternoon was small-cap Gladstone Commerical (GOOD), which reported FFO results ahead of analysts' estimates. GOOD collected 98% of cash rents owed during Q2 and has collected 99% of July cash rent thus far. A dozen REITs will report results tomorrow including apartment REITs Equity Residential (EQR) and UDR Inc (UDR) as well as office REITs Boston Properties (BXP), Highwoods (HIW), and Empire State Realty Trust (ESRT). 

Rent collection - a metric that was rarely reported by REITs in the pre-COVID-19 era - has become the most critical statistic tracked by analysts and investors on earnings reports and interim updates. Illustrating the emerging bifurcation between "essential" and "non-essential" property sectors, rent collection among individual REITs ranged from a low of 15% to 100%. Rent collection has largely been a non-issue for "essential" property sectors, but retail REITs struggled to collect rents during the "lockdown months."

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, after ending last week lower by 0.4%, residential mREITs bounced back today with gains of 1.2%. Following a decline of 1.0% last week, commercial mREITs finished higher by 0.7% today. Today, we published our mREIT Earnings Preview - Mortgage REITs: Back From the Brink - on the iREIT on Alpha Marketplace. The second-largest residential mREIT, AGNC Mortgage (AGNC) jumped 4% in after-hours trading after reporting results after the bell today, noting that tangible book value rose by 9.5% to $13.62 per share from the end of Q1 to the end of Q2. 

Despite a 70% rally from the lows in early-April, mREITs remain lower by more than 40% this year and trade at an estimated 20% discount to book value. Few asset classes have been slammed harder by the pandemic than Mortgage REITs, which have seen a "dividend cut bloodbath" with 33 of 42 mREITs suspending or reducing their dividends. We discussed the three trends that we're watching this earnings season: 1) Dividend Cuts and Resumptions; 2) Updated Book Value Estimates, and 3) Macroeconomic Commentary on the Mortgage and Housing Markets. 

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished lower by 0.2% today, on average, and underperformed their respective common stock issues by an average of 0.3%. Among REITs that offer preferred shares, the performance of these securities has been an average of 18.8% higher in 2020 than their respective common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of “participating” preferred offerings that can be converted into common shares.

This Week's Economic Calendar

As discussed in our Real Estate Weekly Outlook, in addition to a frenetic slate of real estate earnings, we have another busy week of economic data in the week ahead highlighted by GDP data on Thursday which is expected to show a record 34% annualized decline in economic output resulting from the devastating lockdowns in effect from April through June in many parts of the country. We'll also see a few more housing data points with Case Shiller home price data on Tuesday and Pending Home Sales on Wednesday. Initial and Continuing Jobless Claims data, released on Thursday, will also continue to be our focus for indications that more temporarily-unemployed Americans are returning to work.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: 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. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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