• Alex Pettee, CFA

REIT Earnings • Data Center M&A? • Tax Hike Opposition

Summary

  • U.S. equity markets stretched their rally to a sixth straight session today following another slate of solid earnings results and on reports that Democrats are pursuing a scaled-back tax-and-spending plan.

  • Closing within a quarter-percent of fresh all-time highs, the S&P 500 climbed another 0.4% today while the Mid-Cap 400 gained 0.8% and the Small-Cap 600 rose 0.6%.

  • Real estate equities were among the leaders today as the Equity REIT Index gained 1.6% with 17-of-19 property sectors in positive territory while mortgage REITs gained 0.6%.

  • Data center REIT CyrusOne (CONE) jumped 5% after Cowen analyst Colby Synesael upgraded CONE to Outperform on the expectation that the long-rumored takeout is "imminent."

  • We'll hear results this afternoon from Crown Castle (CCI), First Industrial (FR), Rexford (REXR), and SL Green (SLG). Then tomorrow morning, we'll hear results from Safehold (SAFE).

Real Estate Daily Recap

U.S. equity markets stretched their rally to a sixth straight session today following another slate of solid earnings results and on reports that Democrats are pursuing a scaled-back tax-and-spending plan. Closing within a quarter-percent of fresh all-time highs, the S&P 500 climbed another 0.4% today while the Mid-Cap 400 gained 0.8% and the Small-Cap 600 rose 0.6%. Real estate equities were among the leaders today as the Equity REIT Index gained 1.6% with 17-of-19 property sectors in positive territory while Mortgage REITs gained 0.6%.

Nine of the eleven GICS equity sectors were higher today, led today by the domestic-focused and yield-sensitive segments of the market including Utilities (XLU) and Real Estate (XLRE). The 10-Year Treasury Yield was steady today near four-month highs as the relentless rise in Commodities (DJP) continued today to push their year-to-date gains to over 40% - the best-performing major asset class this year. Homebuilders and the broader Hoya Capital Housing Index were also among the leaders today on data showing a continued surge in rents ahead of Existing Home Sales data tomorrow.

Equity REITs & Homebuilders

Yesterday we published our Real Estate Earnings Preview. Real estate 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. Residential REITs and specialty REIT sectors - billboard, cannabis, and timber REITs - delivered the strongest returns over the last quarter. Large-cap technology REITs have uncharacteristically lagged. The report will discuss the major themes and metrics we'll be watching across each of the real estate property sectors this earnings season in what will surely be another newsworthy and potentially volatile several weeks for the red-hot real estate sector. We'll hear results this afternoon from Crown Castle (CCI), First Industrial (FR), Rexford (REXR), and SL Green (SLG).


Shopping Center: Kite Realty (KRG) and Retail Properties of America (RPAI) jointly announced that shareholders of both companies approved all of the proposals necessary for the closing of the previously announced merger of the two REITs with Kite Realty continuing as the surviving public company. The deal is expected to close on Friday. We've seen the "animal spirits" come alive this year with two shopping center IPOs - Phillips Edison (PECO) and InvenTrust (IVT) and two major consolidations with Kimco Realty (KIM) buying Weingarten and Kite Realty (KRG) buying Retail Properties of America. This earnings season, we'll be focused on leasing spreads and occupancy rates which appeared to definitively bottom in early 2021.

Data Center: Speaking of M&A, CyrusOne (CONE) jumped 5% after Cowen analyst Colby Synesael upgraded CONE to Outperform on the expectation that a "takeout is imminent." Last month, Reuters reported that CONE was "exploring its strategic options" which included a potential sale of the company. Citing "industry contacts," Cowen believes that a takeout will soon occur at $85-90/share. Back in June, QTS Realty was acquired by Blackstone (BX) in an all-cash deal at $78/share - a roughly 21% premium to QTS's prior closing price. Several weeks earlier, DigitalBridge acquired Landmark Dividend and has proposed to acquire the outstanding common shares of Landmark Infrastructure Partners (LMRK) for $13.00/share, but two competing offers have emerged over the last two months as a bidding war develops for the small-cap MLP.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly-higher today as commercial mREITs gained 0.7% and are now higher by 1.1% this week while residential mREITs climbed 0.2% to push their weekly gains to 0.9%. On a relatively quiet day of newsflow ahead of the start of earnings season next week, New York Mortgage Trust (NYMT) and KKR Real Estate (KREF) led the way today. The average residential mREIT now pays a dividend yield of 8.4% while the average commercial mREIT pays a dividend yield of 6.5%.

Economic Data This Week

The busy week of economic and housing data continues on Thursday when the National Association of Realtors releases Existing Home Sales data which is expected to show an acceleration back above the 6M annualized rate following a late-summer cooldown. We'll also be monitoring a flurry of Purchasing Managers Index ("PMI") data throughout the 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: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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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