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  • Alex Pettee, CFA

Fed Steady • Urban-Suburban Divide • REIT Earnings

Summary

  • U.S. equity markets finished slightly lower Wednesday amid a busy slate of corporate earnings reports and after Fed Chair Powell reiterated the FOMC's commitment towards accommodative monetary policy.

  • Trading in a relatively tight range all week, the S&P 500 finished fractionally lower today while the Mid-Cap 400 finished fractionally higher and the Small-Cap 600 gained 0.2%.

  • REITs were mixed again amid a jam-packed 48 hours of earnings reports. The broad-based Equity REIT ETFs finished lower by 0.2% with 12-of-19 property sectors in positive territory.

  • The trio of coastal-focused apartment REITs that reported results yesterday revealed that rental trends in urban markets are gradually improving, while Sunbelt-focused housing REITs continue to report stellar results.

  • Similar urban-suburban themes were seen in office REIT earnings results over the last 24 hours as well. Sunbelt-focused Highwoods (HIW) reported strong results and boosted guidance while coastal-focused REITs have seen a muted rebound in activity.

Real Estate Daily Recap

U.S. equity markets finished slightly lower Wednesday amid a busy slate of corporate earnings reports and after Fed Chair Powell reiterated the FOMC's commitment towards accommodative monetary policy. Trading in a relatively tight range all week, the S&P 500 ETF (SPY) finished fractionally lower today while the Mid-Cap 400 (MDY) finished fractionally higher and the Small-Cap 600 (SLY) gained 0.2%. REITs were mixed again amid a jam-packed 48 hours of earnings reports with more than 50 equity REITs reporting Q1 results. The broad-based Equity REIT ETFs (VNQ) finished lower by 0.2% with 12-of-19 property sectors in positive territory while Mortgage REITs (REM) finished higher by 0.6%.

Markets had little reaction to comments from Fed Chair Powell, who reiterated that the FOMC sees the recent inflationary pressure as "transitory" and that it believes that “substantial further progress” in economic growth is needed before the Fed would begin tightening monetary policy conditions. 4 of the 11 GICS equity sectors finished higher on the day, led to the upside by the Energy (XLE) sector, which jumped after data showed a jump in oil demand. Homebuilders and the broader Hoya Capital Housing Index were mixed today ahead of a busy slate of housing-related earnings results this afternoon.

Commercial Equity REITs

Apartment: The trio of coastal-focused apartment REITs that reported results yesterday afternoon - Equity Residential (EQR), Essex Property (ESS) and UDR Inc (UDR) - revealed that rental trends in urban markets are gradually improving. EQR and UDR both boosted full-year guidance across the board while ESS held guidance steady. EQR - which reported the weakest trends in 2020 - has seen a mild improvement in rent growth but leasing spreads were still -12.1% lower on a year-over-year basis in Q1 while ESS reported -6.2% spreads. UDR - which has lower exposure to the troubled urban markets - saw spreads turn positive in Q1. Mid-America (MAA), AvalonBay (AVB), and Independence (IRT) report this afternoon.

Industrial: EastGroup (EGP) finished higher by about 1% today after reporting strong results yesterday afternoon, consistent with the "beat-and-raise" reports seen across the logistics sector thus far this earnings season. EGP boosted its full-year FFO growth outlook to 7.6%, up from 5.6% in the prior outlook, and now projects same-store NOI growth of 4.4%, up from 4.0% in the prior outlook. In Logistics REITs: Sorry, Out of Stock, we discussed the fragility of global supply chains how that's translating into insatiable demand for industrial real estate space. We'll hear results from Duke Realty (DRE) this afternoon.

Shopping Center: Retail Opportunity (ROIC) finished lower by about 1.5% today after reporting results yesterday afternoon. ROIC reported that it collected 92% of rent in Q1 - steady with the prior quarter - but slightly below its peers which have reported collection rates of 95% or above. Same-store NOI declined by -5.6% on a year-over-year basis, an improvement from the -8.8% decline last quarter. While rent collection has improved considerably across the sector, it remains a few percentage points below "normal" levels at roughly 95%. Acadia Realty (AKR) will report results this afternoon.

Storage: ExtraSpace (EXR) and Public Storage (PSA) report results this afternoon. As discussed yesterday in Urban Exodus Catalyzes Recovery, driven by the suburban housing boom and the desire for more space, self-storage demand has rebounded sharply since mid-2020, and so too has the performance and outlook for storage REITs. This "urban exodus" has been a boon for self-storage REITs, which had entered the pandemic as perennial underperformers with challenged fundamentals and a strained outlook amid oversupply headwinds. Supply growth remains a concern, but construction spending has normalized as development yields compress. Rental rates surged in late 2020 and we'll see if the momentum can continue.

Data Center: QTS Realty (QTS) finished roughly flat today after reporting results yesterday afternoon. QTS reported that it signed $20.6 million in leases in Q1, which was roughly in line with estimates following a record-high quarter of leasing activity in the prior quarter. Data Center REITs were the best-performing REIT sector in 2020, riding the "work-from-home" tailwinds that powered a surge in cloud spending. Leasing activity - the most closely watched earnings metric - surged to record-highs in the fourth quarter, eclipsing the prior record set in the second quarter, powered by robust and growing demand from the hyperscalers which continue to lean heavily on these REITs to build capacity. CyrusOne (CONE) and Equinix (EQIX) will report results this afternoon.

Office: Urban-focused Boston Properties (BXP) finished lower by roughly 0.5% today after reporting results yesterday afternoon which showed that leasing activity in urban metros has picked up a bit in recent months even as data from Kastle Systems continues to show that office utilization levels have not meaningfully recovered over the last six months in the largest U.S. cities - New York City, Chicago, Washington DC, and San Francisco. Sunbelt-focused Highwoods (HIW) gained 1.7% after reporting stronger results and boosted its full-year FFO and NOI guidance. This afternoon, we'll hear results from Paramount (PGRE), Piedmont (PDM), Empire State Realty (ESRT), Washington REIT (WRE), and Kilroy (KRC).

We'll also hear results this afternoon from net lease REIT Getty Realty (GTY), single-family rental REIT Invitation Homes (INVH), healthcare REIT Welltower (WELL), and hotel REIT Hersha (HT). We'll have full coverage and instant analysis throughout the afternoon and evening on The REIT Forum. As discussed in our REIT Earnings Preview, results from the handful of REITs that reported results have been impressive - particularly in the housing, logistics, and real estate technology sectors.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.0% today to push their week-to-date gains to 2.1%. Commercial mREITs finished higher by 0.2% today and are now higher by 1.3% on the week. Dynex Capital (DX) jumped nearly 2% after reporting this morning that it recorded a total economic return of 7.2% in Q1 as its BVPS rose by 99 cents to $20.07. Tremont Mortgage Trust (TRMT) declined by about 1% after reporting yesterday afternoon that its BVPS rose 1.8% in Q1. Blackstone Mortgage (BXMT) dipped 1.7% today after reporting this morning that its BVPS was roughly flat in Q1.

This afternoon, we'll hear results from Capstead Mortgage (CMO), Annaly Capital (NLY), and Redwood Trust (RWT) and we'll hear results tomorrow from NexPont Real Estate (NREF), Orchid Island (ORC), and iStar (STAR).

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.26% today, on average, but underperformed their respective common stock issues by an average of -1.16%. So far in 2021, REIT Preferred stocks are higher by 7.24% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.27% and trades at a slight premium to par value.

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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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