Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Peak Earnings | Stocks Rebound |  REITs Boost Guidance

  • U.S. equity markets rebounded Thursday on better-than-expected economic data that showed a continued improvement in the labor markets and a record surge in GDP growth in the third quarter.

  • After flirting with "correction territory" yesterday, S&P 500 finished higher by more than 1% today while the Nasdaq 100 gained nearly 2% and the Dow Jones Industrial Average rebounded 139-points.

  • In the midst of the busiest 24 hours of REIT earnings season, the broad-based Equity REIT ETF (VNQ) finished higher by 1.2% today with 17 of 18 property sectors finishing higher.

  • U.S. GDP surged by 33.1% in the third quarter - the biggest gain on record - while Jobless Claims data showed that the insured unemployment rate slid another 0.4 percentage points to just 5.1%, the lowest insured unemployment rate since February.

  • More than 50 equity and mortgage REITs have reported results over the last 48 hours. So far this earnings season, we've seen five dividend boosts and no additional dividend cuts.

Real Estate Daily Recap

U.S. equity markets rebounded Thursday on better-than-expected economic data that showed a continued improvement in the labor markets and a record surge in GDP growth in the third quarter. After flirting with "correction territory" yesterday, S&P 500 ETF (SPY) finished higher by more than 1% today while the tech-heavy Nasdaq 100 (QQQ) gained nearly 2% and the Dow Jones Industrial Average (DIA) rebounded 139 points following yesterday's 943 point-dip. In the midst of the busiest 24 hours of real estate earnings season, the broad-based Equity REIT ETF (VNQ) finished higher by 1.2% today with 17 of 18 property sectors finishing in positive territory while the Mortgage REIT ETF (REM) jumped by 2.3%.

Continued concerns over a "second wave" of the coronavirus outbreak were overmatched today by strong economic data and corporate earnings results with another busy slate of results this afternoon. U.S. GDP surged by 33.1% in the third quarter - the biggest gain on record - following the largest drop on record last quarter amid the devastating economic lockdowns. 9 of the 11 GICS equity sectors finished higher today led by a rebound in the Energy (XLE), Communications (XLC), and Materials (XLB) sectors. However, all 11 GICS equity sectors remain lower by at least 2.7% on the week. Homebuilders and the broader Hoya Capital Housing Index pulled back today, however, after the NAR reported that Pending Home Sales were essentially flat in September but remained higher by more than 20% from last year.

While the housing markets have continued resilience, the employment recovery had been showing signs of slowing in recent weeks, but we saw more encouraging data this morning from the Department of Labor. Initial Jobless Claims ticked lower to 751k from last week's downwardly revised 791k, the lowest week of initial claims since the pandemic began. Continuing Claims decreased to 7.76 million, down another more than 700k from last week. Since the peak in early May at 24.9 million, Continuing Claims have retreated by 17.5 million. The insured unemployment rate slid another 0.4 percentage points to just 5.1%, the lowest insured unemployment rate since February.

Riding the red-hot housing market, homebuilder earnings results have been stellar so far this quarter. MDC Holdings (MDC) reported this morning that order growth surged by 73% in the third quarter, roughly consistent with yesterday's results from M/I Homes (MHO) and Taylor Morrison (TMHC), which reported order growth of 71% and 74%, respectively.MDC also boosted its quarterly dividend by 21% to $0.40 per share, representing a forward-yield around 3.55%, the highest among homebuilders. Fellow homebuilders Lennar (LEN) and KB Home (KBH) boosted their quarterly dividends earlier this month. Century Communities (CCS) reported strong results as well yesterday afternoon with order growth higher by 57% from last year. 

Commercial Equity REITs Last week, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season kicks into high gear over the next three weeks as more than 200 REITs and housing industry companies will report earnings. Rent collection - a metric that was rarely reported in the pre-COVID-19 era - has become the most critical statistic tracked by investors due to its impact on dividend-paying capacity. REITs enter third-quarter earnings season as the third-worst performing out of 11 GICS equity sectors, but improving rent collection and dividend commentary could be a positive catalyst to drive a recovery. We recap the notable earnings reports over the last 24 hours below.

Data Center: CyrusOne (CONE) gained 1.3% today despite reporting disappointing leasing results yesterday afternoon with just $10.7 million in incremental annualized revenue, down from last quarter's $37 million, but did boost its FFO guidance. Equinix (EQIX) finished lower by 2% after it reported results yesterday afternoon that were roughly in-line with estimates but boosted its full-year AFFO per share outlook by about 1%. EQIX now expects AFFO per share growth of 7.4% in 2020. CoreSite (COR) gained 1% today after it reported this morning that it signed $12.5 million in incremental annualized revenue, the highest in four quarters. COR also increased its FFO per share guidance and now expects 3.5% in 2020. Digital Realty (DLR) rounded out earnings season this afternoon by reporting leasing of $89 million in Q3 - on the high end of expectations - while making it a perfect five-for-five by raising full-year FFO guidance.

Apartments: After this afternoon's results from AIMCO (AIV), Camden Properties (CPT), and UDR Inc (UDR), we'll have heard results from the nine largest apartment REITs. The "urban exodus" theme was on full display this quarter as apartment REIT properties in the "shutdown cities" - NYC, L.A., Chicago, and San Francisco – have seen residents flee to lower-cost and safer suburban markets and more business-friendly Sunbelt metros. While rent collection remains strong at roughly 97-98%, rental rates and occupancy dipped considerably in urban markets which was on full display in the Q3 results this week from Equity Residential (EQR), AvalonBay (AVB), and Essex Properties (ESS). Sunbelt markets continue to see positive year-over-year rent growth and we saw signs of an acceleration in rent growth in October. Urban markets, however, don't appear to have bottomed yet.

Single-Family Rentals: Invitation Homes (INVH) gained 0.3% after it reported solid results yesterday afternoon, as same-store NOI growth grew 3.6% from last year on revenue growth of 2.4%. Average occupancy rose to record-highs at 97.8%, up 190 basis points from last year. Blended lease rates rose 4.0% on renewal growth of 3.3% and new lease growth of 5.5%. INVH collected 98% of their typical Q3 rents. This suggests that trends will be consistent with last quarter when rent growth was far stronger than their apartment peers, with blended rent growth rising 3.2% year over year in Q2, while occupancy climbed to record-highs and turnover dipped to new lows. American Homes 4 Rent (AMH) reports results next week. Shopping Centers: With this afternoon's results from Cedar Realty (CDR), we'll have heard results from six of the seventeen REITs in the sector. Kite Realty (KRG) gained about 1% today after it reported yesterday afternoon that rent collection improved to 92% in Q2 but recorded a 6.9% decline in same-store NOI. Weingarten (WRI) jumped nearly 4% after it reported similar rent collection metrics and a same-store NOI decline of 8.1%. Same-store NOI growth - which declined by an average of nearly 18% in Q2 - has become "less bad" but is still not pretty. These REITs have reported an average same-store NOI decline of 9.1% from last year. 

Net Lease: With this afternoon's results from Netstreit (NTST), we've now heard results from five of the sixteen net lease REITs thus far, setting up a busy week of earnings next week. Alpine Income (PINE) and Getty Realty (GTY) have been the standouts after each announced a dividend increase last week, two of the seven net lease REITs to have raised its dividend this year. Agree Realty (ADC) and Four Corners (FCPT), meanwhile, reported similarly solid results with rent collection approaching 100%. As expected, rent collection has improved sequentially significantly from a low of 65% in April to about 95% by September, as the vast majority of tenants have now reopened. Major reports next week will be Realty Income (O), National Retail (NNN), and Store Capital (STOR).

Casinos: VICI Properties (OTC:VICI) jumped more than 3% after it reported strong results yesterday afternoon, beating on the top and bottom line underscored by a 22.9% year-over-year increase in AFFO per share in Q3 as rent collection remains perfect. Earlier in the week, Gaming & Leisure Properties (GLPIreported that it collected 99% of rents to date and that all tenants other than Casino Queen - which is now paying rent - are current with their obligations. 45 out of their 46 properties have reopened with safety protocols and capacity constraints. Despite the pain felt across the travel and leisure industry, rent collection has been spotless since the start of the pandemic and dividends have been essentially untouched.

Cell Towers: American Tower (AMT) finished higher by 0.7% today after it reported better-than-expected results this morning, boosting guidance across the board with AFFO per share now expected to rise by 6.3% in 2020. Last week, Crown Castle (CCIboosted its dividend by 11%, but lowered its full-year outlook for revenue growth, EBITDA, and FFO per share. CCI did however provide a strong outlook for 2021, consistent with commentary over the last quarter suggesting that T-Mobile (TMUS) has been slow to "kick into gear" on its 5G network rollouts following its merger with Sprint earlier this year. For 2020, it now sees AFFO per share growth up 7.0% and 10.0% in 2021. We continue to see Apple's (AAPL) iPhone 12 launch as the true "arrival" of 5G, the much-anticipated next-generation mobile network.

Healthcare: Welltower (WELL) jumped 4.5% today after it reported stabilization in its troubled senior housing portfolio with occupancy declining by 150 basis points in Q3 consistent with prior updates while it continues to collect nearly 100% of rent from its other segments. Hospital-focused Medical Properties Trust (MPW) jumped 5.5% after it reported this morning that it's collecting 100% of current rent and interest due from tenants while nothing that operating conditions have approached or exceeded pre-COVID levels. LTC Properties (LTC) and Omega Healthcare (OHI) report results this afternoon. (Check back this evening for updates) 

Prisons: Geo Group (GEO) jumped by 9.5% after it reported solid results this morning and boosted AFFO per share guidance to $2.44 at the midpoint, but this is still lower by 11.3% from last year. On the earnings call, GEO didn't make any comments to suggest that there are any immediate plans to abandon the REIT structure. CoreCivic (CXW) will report its final quarterly results as a REIT next week, as the firm announced last quarter that is abandoning the REIT structure at the end of the year. While intrinsic value exists in the 125 prisons and nearly 200,000 prisons beds that are generally in short supply in states, these companies will likely face continued difficulty operating as public entities. 

HotelsWith this morning's results from Chatham Lodging (CLDT) and this afternoon's results from Pebblebrook Hotels (PEB), we'll have heard results from four of the eighteen hotel REITs. On average, these REITs have reported a roughly 20-percentage-point increase in occupancy from Q2 rates, a quarter in which occupancy rates averaged a record-low 32.5%. This is broadly consistent with STR data which has shown that national hotel occupancy has rebounded to 50% by mid-October, a recovery that has held steady despite strong seasonal headwinds. TSA Checkpoint data, which correlates closely with hotel occupancy, shows that airline travel has continued to grind higher in recent weeks despite the seasonal acceleration in COVID-19 cases.

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 1.5% today but remain lower by 3.7% this week. Commercial mREITs jumped by 3.2% today but are still lower by 2.2% this week. Annaly Capital (NLY) gained nearly 2% today after it reported that its Book Value Per Share rose by roughly 4% in Q3 to $8.70 per share. Capstead Mortgage (CMO) declined by more than 3% today after it reported that its BVPS was flat in Q3. On the commercial mREIT-side, Blackstone Mortgage (BXMT) jumped nearly 5% after it reported this morning that it collected 99% of interest payments and that its BVPS increased by 0.2% from last quarter. Ares Commercial Real Estate (ACRE) also jumped nearly 5% after it reported this morning that its BVPS rose by 0.9% to $14.03. NexPoint Real Estate Finance (NREF) finished higher by roughly 1.5% after it reported that its BVPS rose 0.8%.

After the close today, we'll hear results from Orchid Island (ORC), Redwood Trust (RWT), and Ladder Capital (LADR). Earlier this week we published our Mortgage REIT Earnings Preview. Mortgage REITs took center-stage during the early stages of the pandemic as financial market instability violently shook the mREIT sector to the core with mind-numbing declines of more than 70%. Buoyed by a suddenly red-hot U.S. housing market, residential mREITs have rallied back from the brink over the last two quarters and have nearly doubled in value from their lows. The 3 trends we're watching this earnings season: 1) Dividend resumptions, 2) Updated book values, and 3) Macroeconomic commentary.

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 0.04% today, on average, but outperformed their respective common stock issues by an average of 1.66%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.33% higher in 2020 than their respective common shares. 

This Week's Economic Data The jam-packed week of economic data wraps up tomorrow with Personal Income and Spending data as well as PCE Inflation data. Earlier this week, we got the release of New Home Sales data for September and the release of the Case Shiller Home Price Index and the FHFA House Price Index for August. On Thursday, we'll get our first look at third-quarter Gross Domestic Product, the final major data release before Election Day. 

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