• Alex Pettee, CFA

REIT Earnings • Beat & Boost • Supply Shortages

Summary

  • U.S. equity markets were mixed Thursday as investors tapped the brakes on the "risk-on" trade from the prior two sessions, rotating back into large-cap technology companies and sovereign bonds.

  • Pushing its week-to-date gains to around 1%, the S&P 500 advanced 0.2% today, but the Mid-Cap 400 retreated by 1.1% the Small-Cap 600 slid 1.5%.

  • Real estate equities were under pressure today as the Equity REIT Index finished lower by 0.8% with 17-of-19 property sectors in negative territory while Mortgage REITs retreated 1.8%.

  • Homebuilder Tri Pointe (TPH) finished higher by more than 3% today after reporting strong results, commenting that "demand trends remained elevated in all of our markets and at all price points, a sign that buyers remain motivated."

  • Industrial REITs Rexford (REXR) and First Industrial (FR) each raised full-year guidance, as did cell tower REIT Crown Castle (CCI). Office REIT SL Green (SLG) reported continued weakness in its urban office markets.

Real Estate Daily Recap

U.S. equity markets were mixed Thursday as investors tapped the brakes on the "risk-on" trade from the prior two sessions, rotating back into large-cap technology companies and sovereign bonds. Pushing its week-to-date gains to around 1%, the S&P 500 advanced 0.2% today, but the Mid-Cap 400 retreated by 1.1% the Small-Cap 600 slid 1.5%. Real estate equities were under pressure today, led to the downside by COVID-sensitive sectors as the Equity REIT Index finished lower by 0.8% with 17-of-19 property sectors in negative territory while Mortgage REITs retreated 1.8%.

Concern over the uptick in global COVID cases continues to keep downward pressure on global interest rates as the 10-Year Treasury Yield ticked lower to close at 1.27%. Six of the eleven GICS equity sectors finished higher on the day, led to the upside but the Technology (XLK), Healthcare (XLV) sectors while the economically-sensitive sectors including Financials (XLF) and Energy (XLE) lagged. Homebuilders and the broader Hoya Capital Housing Index were mixed today as strong homebuilder earnings were offset by a mixed Existing Home Sales report amid a continued supply shortage.

Homebuilder Tri Pointe (TPH) finished higher by more than 3% today after reporting strong results, commenting that "demand trends remained elevated in all of our markets and at all of our price points, a sign that buyers remain motivated." TPH reported that net orders were up 22% year-over-year while its backlog swelled by more than 50%. DR Horton (DHI) finished lower by 2% despite reporting strong results and raising its full-year outlook. Reflecting its "throttling" of new sales in Q2 as the builder works through its backlog, net sales decreased 17% in the quarter. DHI commented, “Housing market conditions remain very robust, with homebuyer demand exceeding our current capacity to deliver homes across all of our markets."

Commercial Equity REITs

Industrial: Following strong results earlier in the week from Prologis (PLD), Rexford (REXR) finished slightly lower today despite reporting a strong "beat and raise" quarter yesterday afternoon. REXR now projects full-year NOI growth of 9.5%, up from its prior outlook for 7.25% growth. REXR also boosted its FFO guidance, which is now projected to rise by 13.3% this year, up from its prior outlook calling for 8.0% growth. First Industrial (FR) finished lower by 2% despite reporting strong results, boosting its full-year FFO growth guidance to 4.9%, up from its prior outlook of 3.3% growth.

Cell Tower: Crown Castle (CCI) finished lower by 4.5% despite reporting better-than-expected results and boosting its full-year outlook. Investors focused instead on commentary indicating that the company's small-cell deployment continues to face delays. CCI doesn't expect these delays to materially change its trajectory, however, as it raised its full-year AFFO/share outlook and now expects 12% AFFO/share growth this year, up from its prior guidance of 11.3% growth. As discussed in 5G Dominance, wireless network spending is poised to accelerate amid an increasingly fierce competitive environment as better-capitalized carriers compete for 5G supremacy.

Office: SL Green (SLG) finished sharply lower after reporting disappointing earnings results the long-awaited "return to the office" in its urban markets continue to be pushed back amid ongoing COVID concerns. SLG reported that its same-store NOI declined 9.2% year-over-year in Q2 while its FFO declined by 5.9% from last year. Leasing spreads, which were firmly positive before COVID, were lower by 1.1% in Q2 while occupancy rates remained under pressure. In No Going Back, we discussed why office utilization rates remain a fraction of pre-COVID levels. While the office isn't going away entirely, hybrid work environments - which require less office space - are increasingly standard. Office market rents have plunged 10-20% as vacancy rates soar.

As discussed in our Real Estate Earnings Preview published earlier this week, REIT earnings season kicks off 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. REITs enter second-quarter earnings season as the best-performing asset class this year with total returns over 25%. Residential REITs have been the positive standouts over the last quarter following a slate of impressive Q1 earnings results and recent data showing a historic surge in apartment and single-family rents.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.01% today, on average, but outperformed their respective common stock issues by an average of 1.45%. Pebblebrook Hotels (PEB) priced a new 5.700% Series H Preferred and plans to use the roughly $250m proceeds to redeem all of its 6.50% Series C Cumulative Preferred and either its 6.375% Series D Preferred (PEB.PC) or its 6.375% Series E Preferred (PEB.PE).

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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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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