• Alex Pettee, CFA

REIT Earnings • Beat And Boost • Housing Stays Hot

Summary

  • U.S. equity markets rebounded Wednesday following two days of declines as investors digest a frenetic slate of corporate earnings reports while bond yields remain under pressure from ongoing COIVD issues abroad.

  • Now back within 0.5% of fresh record-highs, the S&P 500 gained 0.9% today while the Mid-Cap 400 gained 1.7% and the Small-Cap 600 rallied 1.8%.

  • Real estate equities continued their strong week ahead of a handful of earnings reports this afternoon. The broad-based Equity REIT Index finished higher by 0.7% with 15-of-19 property sectors in positive-territory.

  • Mortgage applications to purchase a home increased 7% from last week and were 57% higher from last year, according to data this morning from the MBA. Mortgage rates declined to two-month lows.

  • This afternoon, we'll hear results from industrial REITs Rexford (REXR) and First Industrial (FR), office REITs SL Green (SLG) and Brandywine (BDN), and cell tower REIT Crown Castle (CCI).

Real Estate Daily Recap

U.S. equity markets rebounded Wednesday following two days of declines as investors digest a frenetic slate of corporate earnings reports while bond yields remain under pressure from ongoing COIVD issues abroad. Now back within 0.5% of fresh record-highs, the S&P 500 ETF (SPY) gained 1.0% today while the Mid-Cap 400 (MDY) gained 1.7% and the Small-Cap 600 (SLY) rallied 2.3%. Real estate equities continued their strong week ahead of a handful of earnings reports this afternoon. The broad-based Equity REIT ETFs (VNQ) finished higher by 0.7% today with 15-of-19 property sectors in positive territory while Mortgage REITs (REM) rallied 1.2%.

Reversing the trends from earlier in the week, reopening-sensitive stocks led the way today while COVID-winner Netflix (NFLX) dipped more than 7% today after posting disappointing subscriber growth. Ten of the eleven GICS equity sectors finished higher on the day, led to the upside by the Materials (XLB), Financials (XLF), and Industrials (XLF) sectors. Homebuilders and the broader Hoya Capital Housing Index rebounded as well after upbeat mortgage market data and decent results from high-flying homebuilder NVR Inc (NVR), which reported a 26% year-over-year jump in orders in Q1 while the size of its backlog swelled by 51% to $5.20 billion.

The Mortgage Bankers Association reported this morning that mortgage rates dropped to their lowest levels in around two months last week, driving a jump in mortgage demand. Mortgage applications to purchase a home increased 7% compared with the previous week and were 57% higher than the same week one year ago. The MBA's chief of economic forecasting "expects the purchase market to remain strong, with the recovering job market and supportive demographics fueling housing demand in the months ahead."

Commercial Equity REITs

Just a few weeks after the final REITs reported Q4 earnings results, we've already begun Q1 real estate earnings season. Gear up for a frenetic month of newsflow as over the next four weeks, we'll hear results from more than 175 equity REITs, 40 equity REITs, and dozens of housing industry companies. This afternoon, we'll hear results from industrial REITs Rexford (REXR) and First Industrial (FR), office REITs SL Green (SLG) and Brandywine (BDN), and cell tower REIT Crown Castle (CCI).

Net Lease: This afternoon, Apline Income (PINE) boosted its dividend for the second time this year. We've seen 51 equity REITs and 17 mortgage REITs increase their dividends through the first quarter of 2021. For net lease REITs, recent earnings reports confirmed that acquisition-fueled growth kicked back into gear in late 2020 and is expected to power a rebound in AFFO growth after the 7% average decline in 2020.

Industrial: Rexford (REXR) and First Industrial (FR) report Q1 results this afternoon. Earlier this week, we published Logistics REITs: Sorry, Out of Stock. The coronavirus pandemic has exposed the fragility of global supply chains and demand for industrial real estate space remains insatiable as businesses scramble to invest in logistics resiliency. Order delays and bottlenecks have worsened amid the global economic reopenings, frustrating both businesses and consumers alike. The "hub of e-commerce" and the hottest property sector of the last half-decade, industrial REITs recorded the strongest earnings and dividend growth of any real estate sector in 2020.

Cell Tower: We'll also hear results this afternoon from Crown Castle (CCI). Emerging from relative obscurity early last decade, Cell Tower REITs have developed into dominant players of both the telecommunications and real estate sectors through relentless growth. After uncharacteristically lagging early this year, Cell Tower REITs - along with other "essential" property sectors across the technology and housing sectors - have rebounded over the past month. Cell Tower REITs delivered another stellar year in 2020 with FFO growth of nearly 9% with no signs of slowing.

Office: SL Green (SLG) and Brandywine (BDN) will also report Q1 results this afternoon. A year into the pandemic, office utilization in major U.S. cities remains a fraction of pre-pandemic levels with coastal cities facing a particularly slow recovery. The "reopening rotation" has boosted many of the urban office REITs to double-digit percentage gains this year even after quarterly results showed punishing declines in FFO/share growth in 2020. We think that dense coastal office markets with brutal transit-heavy commutes will struggle in the new normal while Sunbelt and suburban-focused office REITs are poised for a faster and more sustainable recovery.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.5% today but remain lower by -1.0% on the week. Commercial mREITs were also higher by 1.5% today and are now lower by -0.9% this week. ARMOUR Residential REIT (ARR) was a laggard today after it declared a $0.10/share monthly dividend, in line with its previous rate, representing a forward yield of roughly 9.9%. Mortgage REIT earnings season is slated to kick off next Monday with results from KKR Real Estate (KREF), and AGNC Investment (AGNC).

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.29% today, on average, but outperformed their respective common stock issues by an average of -1.19%. So far in 2021, REIT Preferred stocks are higher by 6.58% on a price-return basis and the average REIT preferred currently pays a dividend yield of 6.28% and trades at a slight discount to par value.

Economic Data This Week

On Thursday, we'll see Existing Home Sales data which is expected to show that the sales rate was roughly even with last month as the mere lack of available homes to sell has emerged as a near-term constraint on further upside. On Friday, we'll see New Home Sales data which is expected to show a solid jump in March from the weather-affected February data, consistent with the trends observed this week with Housing Starts data. We'll also be watching the weekly MBA Mortgage data on Wednesday, Jobless Claims data on Thursday, and PMI data on Friday.

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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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