• Alex Pettee, CFA

Fed Holds • Earnings Frenzy • REITs Beat & Raise

Summary

  • U.S. equity markets were mixed Wednesday after the Federal Reserve maintained the status-quo while a busy slate of earnings results continued to beat consensus estimates at a historically strong rate.

  • Following declines of 0.5% yesterday, the S&P 500 finished fractionally lower today while the Mid-Cap 400 and the Small-Cap 600 each rallied 0.8%.

  • Real estate equities were mixed despite a very strong slate of earnings results over the past 24 hours as the Equity REIT Index declined 0.6% with 8-of-19 property sectors in positive territory.

  • Self-storage REIT ExtraSpace rallied after reporting another stellar quarter as the incredible turnaround continued for the previously middling storage sector. EXR boosted its FFO guidance by 830 bps and now sees 23.7% growth this year.

  • Homebuilder M/I Homes surged after reporting strong results with EPS nearly doubling from last year, noting that its backlog swelled to nearly 5.5k units, up 50% from last year after another record-setting quarter of order growth.

Real Estate Daily Recap

U.S. equity markets were mixed Wednesday after the Federal Reserve maintained the status-quo while a busy slate of earnings results continued to beat consensus estimates at a historically strong rate. Following declines of 0.5% yesterday, the S&P 500 finished fractionally lower today while the Mid-Cap 400 and the Small-Cap 600 each rallied 0.8%. Real estate equities were mixed despite a very strong slate of earnings results over the past 24 hours as the Equity REIT Index declined 0.6% with 8-of-19 property sectors in positive territory while Mortgage REITs gained 0.5%.

Fed Chair Powell commented that there's "a ways to go" after Fed officials maintained their current policy objectives but signaled that they're moving gradually closer to tapering while shrugging-off near-term inflationary concerns. Five of the eleven GICS equity sectors finished higher today, led to the upside by the Communications (XLC) sector following earnings results from Alphabet (GOOG) and Apple (AAPL). Homebuilders and the broader Hoya Capital Housing Index were mixed ahead of a jam-packed slate of results from rental REITs and homebuilders over the next 24 hours.

Real Estate Earnings Updates

Student Housing: Today, we published our updated sector overview of the student housing sector and its lone REIT constituent, American Campus (ACC). The recent reacceleration in worldwide COVID cases - and resulting "public health" mandates - threaten to delay the complete return of in-person learning. ACC's focus on highly-selective flagship universities across Sunbelt markets - most of which offered in-person classes throughout the pandemic - has proven to be especially critical. ACC reported encouraging Q2 results this week as pre-leasing accelerated significantly to 91.7% for the upcoming year.

Apartment: Equity Residential (EQR) made it three-for-three "beat and boost" reports from the multifamily sector. EQR significantly raised its full-year FFO and NOI outlook as rent growth turned firmly positive on a year-over-year basis by July. EQR boosted its NOI outlook by 400 bps and its FFO outlook by 560 bps from its prior guidance provided during REITweek. EQR commented, "our operations continue to recover rapidly with robust demand for our apartments in all our markets leading to high occupancy, increased pricing power and an almost complete absence of new lease concessions.” AvalonBay (AVB), UDR (UDR), and Mid-America (MAA) report results this afternoon.

Self-Storage: ExtraSpace (EXR) gained about 1% after reporting another stellar quarter as the incredible turnaround for the previously middling storage sector continued in Q2. EXR boosted its FFO guidance by 830 bps and now sees 23.7% growth this year and raised its full-year same-store NOI outlook by 750 bps to 14.5%. EXR commented, "we had an exceptionally strong second quarter, with record setting occupancy and very strong rental rates... Our excellent property performance, coupled with accretive investments, led to FFO growth of 33.3%." Self-Storage REITs have delivered as impressive of a turnaround as any property sector in recent memory, catalyzed by the ongoing housing boom and the acceleration in housing market turnover.

Homebuilders: M/I Homes (MHO) surged after reporting strong results with EPS nearly doubling from last year, noting that its backlog swelled to nearly 5.5k units, up 50% from last year after another record-setting quarter of order growth. MHO commented, " Demand for new homes continues to be very strong. Despite our community count being down throughout the quarter, and significantly limiting sales in the majority of our communities, we set a record for second quarter new contracts." We'll hear results this afternoon from Century Communities (NYSE:CCS) and Meritage (MTH) and results tomorrow morning from Taylor Morrison (TMHC) and MDC Holdings (MDC).

Net Lease: EPR Properties (EPR) dipped 2% after reporting mixed results yesterday afternoon. EPR introduced FFO guidance for 2021 at $2.81 at the midpoint, a nearly 50% jump from last year but still nearly 50% below its pre-pandemic FFO of $5.44 in 2019. EPR reported that it collected roughly 85% of rents in Q2 - up from around 65% in Q1 - and that 99% of the Company's theatre and 100% of the Company's non-theatre locations were open. Despite their heavy retail and restaurant exposure, net lease REITs - with the exception of EPR - fared far better than their retail REIT peers with rent collection "normalizing" by late 2020. Getty (GTY) reports this afternoon.

Industrial: Following a trio of strong results last week from Prologis (PLD), Rexford (REXR), and First Industrial (FR), yesterday afternoon EastGroup (EGP) reported strong results and raised its full-year same-store NOI growth by 80 bps to 5.2% and its FFO growth guidance by 170 bps to 9.3%. STAG Industrial (STAG) jumped after boosting its full-year FFO growth by 370 bps to 7.4% and its full-year NOI guidance by 150 bps to 3.5%. We'll hear results from Duke Realty (DRE) and Industrial Logistics (ILPT) this afternoon.

As discussed in our Real Estate Earnings Preview, REIT earnings season kicks into high gear this week, and over the next month, we'll hear results from more than 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. In addition to the aforementioned earnings reports, we'll also hear results this afternoon from data center REITs Equinix (EQIX) and CyrusOne (CONE); single family rental REIT Invitation Homes (INVH); shopping center REITs Acadia (AKR), and Retail Opportunity (ROIC); office REITs Kilroy (KRC), Empire State (ESRT), Piedmont (PDM), and Mack-Cali (CLI); casino REIT VICI Properties (VICI) and hotel REITAshford (AHT).

Mortgage REITs

Mortgage REIT coverage and commentary throughout earnings season is now exclusively provided to The REIT Forum subscribers. We heard earnings results from Dynex Capital (DX), Blackstone Mortgage (BXMT), and Tremont Mortgage (NASDAQ:TRMT) over the past 24 hours and we'll hear results from Annaly Capital (NLY) and Capstead Mortgage (CMO) this afternoon. Last week, we published Mortgage REITs: High Yield Bargains. Mortgage REITs endured punishing declines during the pandemic, but have nearly tripled from their lows and are back within shouting distance of pre-pandemic highs.


REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.15% today, on average, and outperformed their respective common stock issues by an average of 0.45%. So far in 2021, REIT Preferred stocks are higher by 9.14% on a price return basis. The average REIT preferred pays a current yield of 5.97% and trades at a slight premium to par value.

Economic Data This Week

The jam-packed slate of housing data and earnings reports this week continues on Thursday when we'll get our first look at second-quarter GDP, which is expected to show an 8.2% annualized gain, and we'll also see Pending Home Sales data for June. On Friday, we'll see inflation data with the PCE Price Index - the Fed's "preferred" gauge of inflation - which is expected to show that prices are rising at the fastest level in at least a decade as well as Personal Income & Spending data.

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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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