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 on The REIT Forum and occasionally on our website and this Seeking Alpha blog to cover significant news and events. Subscribe to our free email list to keep up with the latest developments in the commercial and residential real estate sectors. Follow our real-time commentary on Twitter and LinkedIn.
U.S. equity markets remained near record-highs Tuesday as investors parsed a busy slate of corporate earnings reports and evolving economic forecasts ahead of a closely-watched CPI inflation report tomorrow morning. Following gains of 0.7% yesterday, the S&P 500 ETF (SPY) finished lower by 0.1%, snapping a six-day winning streak, while the Dow Jones Industrial Average (DIA) finished lower by 10 points. Real estate equities were mostly higher today amid a busy slate of REIT earnings as the broad-based Equity REIT ETFs (VNQ) gained 0.4% today with 13-of-19 property sectors in positive territory while Mortgage REITs (REM) pulled back by 0.7%.
A sense of "normalcy" has returned to financial markets following the incredible short squeeze frenzy in late January as the CBOE Volatility Index (VIX) is back on the cusp of the lowest levels since the start of the pandemic. Meanwhile, recent coronavirus data continues to show highly encouraging trends as case counts and hospitalizations continue to receede rapidly. Six of the eleven GICS equity sectors finished on the upside today led by the Commerical Real Estate (XLRE), Communications (XLC), and Industrials (XLI) sectors. Residential REITs led the Hoya Capital Housing Index to the upside as well ahead of results from several housing REITs this afternoon.
Real Estate Earnings Update
Today, we published Casino REITs: Rolling The Dice. One of the top-performing property sectors last year, Casino REITs delivered surprisingly steady performance in 2020 despite the temporary closure and dramatically reduced usage of casino facilities throughout the pandemic. Unlike hotel REITs, casino REITs typically own properties under a long-term, triple-net master lease structure, leaving most of the financial and operational risk to their tenants - the casino operators. With an average dividend yield above 5%, we view the casino REIT sector as a compelling alternative to other more troubled property sectors. Selectivity is critical, and we prefer the "destination" casinos and tenant operators with a solid foothold into the online gaming ecosystem.
Real estate earnings season kicks into high gear this week with roughly four dozen REITs reporting results along with a handful of housing companies. Last week, we published REIT Earnings Preview: Who Paid The Rent? While missed rents and dividend cuts were the prevailing themes in the REIT sector in mid-2020, the vaccine-driven sector rotation has been the dominant theme over the past quarter. Normalizing rent collection and positive dividend commentary could be a positive catalyst to continue the recovery. We expect a historic year for dividend increases following the wave of cuts last year.
Malls: Simon Property (SPG) finished higher by 3.7% today after reporting yesterday afternoon that it collected 90% of Net Billed Rents in Q2 through Q4, but this amounted to just 74% of Gross Contractual Rents, resulting in a -17.1% decline in full-year net operating income ("NOI") including a -23.9% year-over-year dip in Q4. SPG recorded a -24.3% decline in FFO per share in full-year 2020, but sees FFO bouncing back by 5.6% at the midpoint of its 2021 guidance range. While SPG notes that it "feels confident we have turned the corner," forward-looking metrics still look concerning as leasing spreads remain under pressure at -6.8%, the worst quarter on record or Simon, while occupancy rates declined by a sizable 3.8 percentage-points to 91.3%.
Apartments: Coastal-focused REIT UDR Inc (UDR) reported results this afternoon. Consistent with the coastal vs. sunbelt divergence we noted last week, UDR reported that its same-store NOI growth declined by -5.4% in full-year 2020 and sees another tough year ahead with a -2.0% decline forecast for 2021. Rental trends have been far steadier for UDR that its coastal peers, however, as blended leasing rates were lower by a modest 0.3% in Q4 and actually turned positive in January, an encouraging sign that the worst of the downward pressure to rental rates in coastal markets appears to be over.
Industrial: EastGroup (EGP) is flat after-hours after reporting results this afternoon. EGP reported that its full-year FFO growth was 8.0% in 2020 and sees another 5.6% growth in 2021 at the midpoint as the industrial REIT collected over 99.5% of rents throughout the year. Consistent with reports last week from Prologis (PLD) and Duke Realty (DRE), EGP sees 4.0% growth in same-store NOI in 2021 while its full-year growth in 2020 came in above prior guidance at 3.2%. DRE also noted that leasing spreads averaged 15.4% in the fourth-quarter and 21.7% for full-year 2020 as demand remains red-hot.
Healthcare: Welltower (WELL) and Healthpeak (PEAK) reported results this afternoon which we'll discuss in tomorrow's Daily Recap. Consistent with our discussions over the last few months, mid-pandemic fundamentals are also actually stronger for several healthcare REIT sub-sectors including skilled nursing facilities as government relief funds continue to pour into the healthcare sector. Check back for updates this afternoon.
Office: Douglas Emmett (DEI), Highwoods (HIW), and American Assets (AAT) reported results this afternoon. Despite reporting near-perfect rent collection throughout the pandemic, office REITs continue to be under pressure as the “work from home” paradigm threatens the long-term outlook. Survey data and commentary from corporations indicate that the WFH paradigm is here to stay long after the pandemic subsides. Technology like Zoom (ZM) has accelerated the pre-existing trends of increased workplace efficiency. Nuance is required, however, as suburban and Sunbelt office assets are likely to see robust demand over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival."
As tracked in our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.0% today and are now lower by 0.3% this week. Commercial mREITs finished lower by 0.1% but remain higher by 1.0% this week. New Residential (NRZ) declined by 5.2% after reporting results this morning in which the MSR-focused mREIT noted that its Book Value Per Share was essentially flat in Q4, ending the year at $10.87. After reducing its common stock dividend in March 2020, NRZ raised its common stock dividend over the following three consecutive quarters, but the current $0.20 quarterly rate remains below its pre-pandemic rate of $0.50. Two Harbors (TWO) reports results this afternoon.
Last week, we published our Mortgage REIT Earnings Preview. We discussed the three trends we're watching this earnings season: 1) Updated dividend commentary, 2) Updated book values, and 3) Commentary on the mortgage and housing markets. We discussed how the robust rebound and ongoing strength in the U.S. housing sector averted outright catastrophe for many mREITs. Mortgage REITs delivered a triple-digit-percentage-point rebound to end 2020 with total returns of -23.5%.
Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.49% today, on average, and outperformed their respective common stock issues by an average of 0.14%. Excluding the handful of retail and hotel REITs with suspended (cumulative) preferred dividends, the average REIT preferred trades at a 3% discount to Par Value and has an average current yield of 6.46%.
This Week's Economic Calendar
Following a busy three weeks of economic data, the week ahead will be relatively quieter, headlined by the Consumer Price Index report released on Wednesday. Inflation expectations - along with longer-term Treasury Yields - have rebounded sharply since Election Day on the prospects for additional fiscal stimulus and on improving coronavirus data, but recent inflation reports have yet to show a broad-based uptick in either consumer or producer price levels. We'll also be watching the weekly MBA Mortgage Application data on Wednesday and Jobless Claims data on Thursday.
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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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