Dividend Boosts • Inflation Cools • REIT Earnings Updates

Summary

• U.S. equity markets were mixed Wednesday on another frenetic day of corporate earnings reports while inflation data showed that consumer prices were steady in January even as inflation expectations surged.
• Following a decline of 0.1% yesterday, the S&P 500 finished fractionally lower today but remains within 0.1% of record-highs, while the Dow Jones Industrial Average finished higher by 63 points.
• Real estate equities delivered another strong day ahead of a jam-packed 48-hours of earnings reports as the broad-based Equity REIT ETFs gained 0.5% today with 13-of-19 property sectors in positive-territory.
• Providing a boost to the yield-sensitive equity sectors, inflation data this morning showed that despite the recent surge in inflation expectations, core consumer prices - excluding energy - were flat in January.
• More than two dozen REITs will report results over the next 24 hours. American Assets (AAT) was higher today after becoming the 12th REIT to increase its dividend this year.

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 were mixed Wednesday on another frenetic day of corporate earnings reports while inflation data showed that consumer prices were steady in January even as inflation expectations surged. Following a decline of 0.1% yesterday, the S&P 500 ETF (SPY) finished fractionally lower today but remains within 0.1% of record-highs, while the Dow Jones Industrial Average (DIA) finished higher by 63 points. Real estate equities delivered another strong day ahead of a jam-packed 48-hours of earnings as the Equity REIT ETFs (VNQ) gained 0.5% today with 13-of-19 property sectors in positive territory while Mortgage REITs (REM) gained 0.6%.

Five of the eleven GICS equity sectors finished on higher today, led to the upside by the Energy (XLE), Communications (XLC), and Commerical Real Estate (XLRE) sectors. Homebuilders and the broader Hoya Capital Housing Index were mostly higher today ahead of earnings this afternoon from Zillow (Z) and after the Mortgage Bankers Association reported that mortgage applications to purchase a home are now higher by 17% from last year as the housing industry remains a source of strength in the early economic recovery. 

All eyes are on inflation data after Democrats won the "trifecta" of political control in Washington DC as fiscal stimulus is high on the political docket. Inflation expectations - and long-term interest rates - jumped to mid-pandemic highs earlier this month, but pulled back today after the BLS reported this morning that the Core Consumer Price Index (CPI) was flat in January, pulling the annual increase down to 1.39%. The "headline" CPI index recorded a 0.3% increase in January, however, as gasoline and fuel prices jumped from last month, but the headline CPI Index is still higher by just 1.35% over the past year.

Real Estate Earnings Update

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.

Office: American Assets (AAT) finished higher by 0.9% after reporting results yesterday afternoon and announcing a 12% dividend increase to $0.28 per share, but this remains below the $0.30/share rate before the pandemic. Earlier in the week, Armada Hoffler (AHH) announced a similar dividend increase to $0.15/share quarterly dividend, a 36.4% increase from its prior dividend, but still below its pre-pandemic rate of $0.22 per share. Douglas Emmett (DEI) and Highwoods (HIW) finished lower by 0.3% and 0.5%, respectively, after reporting mixed results yesterday afternoon. We'll hear results from Paramount (PGRE) and Piedmont (PDM) this afternoon.

Apartments: Coastal-focused REIT UDR Inc (UDR) finished higher by 1.4% after reporting results yesterday 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. Equity Residential (EQR) reported results this afternoon, noting that its full-year same-store NOI declined by a similar magnitude at -6.6%. Unlike UDR which reported signs of stabilization in leasing trends, EQR's urban markets remain under significant pressure as blended lease rates were lower by 25% in Q4 from last year and were lower by the same magnitude in January.

Also reporting results this afternoon, sunbelt-focused Independence Realty (IRT) reported strong results, noting that its same-store NOI actually increased by 1.8% in full-year 2020 and sees NOI growing by another 2.5% in 2021. Conditions are "night-and-day" relative to their coastal peers when it comes to leasing activity as IRT recorded a positive 3.3% rise in blended rental rates in Q4 and saw that accelerate to 5.4% in January. 

Healthcare: Welltower (WELL) finished higher by 2.8% after reporting yesterday afternoon that COVID conditions have improved materially at its Senior Housing facilities with 77% of its SHO communities reporting no confirmed cases of COVID-19 during the trailing two weeks after over 90% of its SHO portfolio have completed their first vaccination clinic. Results outside of its SHO portfolio remain steady. Healthpeak (PEAK) won't be around to see the rebound in senior housing, however, after reporting that its sold $2.5B of its $4B in planned senior housing sales, and now considers that segment as "discontinued operations." With senior housing removed from the same-store portfolio, PEAK's same-store NOI growth for full-year jumped from 1.0% to 3.8%. PEAK's stated objective is a "targeted Life Science, Medical Office, and CCRC (Continuing Care) portfolio and strategy" portfolio. Healthcare Realty (HR) reports results this afternoon. 

Industrial: EastGroup (EGP) is finished lower by 0.2% today after reporting results yesterday 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. Same-store NOI growth is expected to rise 4.0% at the midpoint, in-line with guidance provided last week from Prologis (PLD) and Duke Realty (DLR). This afternoon, we'll hear results from Rexford (REXR) and STAG Industrial (STAG) which we'll discuss in tomorrow's Real Estate Daily Recap.

Data Center: Equinix (EQIX) is higher after-hours after reporting better-than-expected results this afternoon and boosting its dividend by 7.9% to $2.87/share. Digital Realty (DLR) reports results tomorrow. Last week, CoreSite (COR) reported softer-than-expected guidance for 2021 as COR sees 3.0% FFO growth with rent growth on data centers between 0.0% to 2.0% amid intense competition from hyperscalers Amazon (AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and from other private market players in recent years. However, COR did report that full-year FFO growth exceeded its prior guidance, growing by 4.1% from last year. Incremental leasing revenues, the most closely-watched metric, also came in fairly soft at $9.7 million, down from $12.5 million last quarter as COR has not been as aggressive on the development-front as the other data center REITs.

Shopping Centers: Acadia Realty (AKR) is flat after-hours after reporting results this afternoon. Last week, Cedar Realty (CDR) surged after reporting that rent collection has essentially "normalized" for the open-air shopping center REIT in Q4 as CDR reported collection of 94% of rents. Same-property net operating income (NOI) decreased -4.1% for the quarter, an improvement over its -9.1% decline in Q3 and -14.6% dip in Q2. For full-year 2020, FFO declined by -5.6%, a rather modest decline considering the dire outlook for all retailer landlords in mid-2020. 

Yesterday, 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.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.8% today and are now higher by 0.5% this week. Commercial mREITs finished higher by 0.6% and are now higher by 1.6% this week. Two Harbors (TWO) finished higher by 4.2% after reporting yesterday afternoon that its Book Value Per Share (BVPS) rose by 3.5% in Q4 to $7.63, but this was still roughly 40% below its pre-pandemic BVPS. Chimera Investment (CIM) gained by 0.4% today after reporting this morning that its BVPS rose a similar 3.8% in Q4. On the commercial side, Blackstone Mortgage (BXMT) declined by 1.7% after reporting that its BVPS declined slightly to $26.42 from $26.51 in Q3. 

Annaly Capital (NLY) and Redwood (RWT) reported 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%.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.01% today, on average, but underperformed their respective common stock issues by an average of 0.95%. So far in 2021, REIT Preferred stocks are higher by 2.95%. 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.

I am/we are long all holdings listed at www.HoyaCapital.com