• Alex Pettee, CFA

REIT Earnings • Home Values Jump • mREIT Merger

Summary

  • U.S. equity markets remained on the cusp of record-highs Tuesday amid a frenzy of corporate earnings reports and economic data and ahead of commentary tomorrow from the Federal Reserve.

  • Following gains of 0.2% on Monday, the S&P 500 finished fractionally lower today while the Mid-Cap 400 gained 0.1% and the Small-Cap 600 climbed 0.3%.

  • REITs were mixed today as earnings season hits high gear. The broad-based Equity REIT Index finishing flat with 11-of-19 property sectors in positive territory while Mortgage REITs finished higher by 1.1%.

  • Manufactured housing REIT Sun Communities (SUI) boosted its 2021 Core FFO/share guidance and now sees growth of 17.9% this year - which would almost surely be among the best in the REIT sector. Timber REIT PotlatchDeltic (PCH) also reported strong results.

  • Tremont Mortgage Trust (TRMT) announced yesterday afternoon that it will combine with RMR Mortgage Trust (RMRM) in an all-stock transaction that's intended to create a more diversified commercial mortgage REIT focused on middle-market transitional bridge loans.

Real Estate Daily Recap

U.S. equity markets remained on the cusp of record-highs Tuesday amid a frenzy of corporate earnings reports and economic data and ahead of commentary tomorrow from the Federal Reserve. Following gains of 0.2% on Monday, the S&P 500 ETF (SPY) finished fractionally lower today while the Mid-Cap 400 (MDY) gained 0.1% and the Small-Cap 600 (SLY) climbed 0.3%. REITs were mixed today as earnings season ramps up with more than 50 equity REITs reporting results over the next 48 hours. The broad-based Equity REIT ETFs (VNQ) finishing flat with 11-of-19 property sectors in positive territory while Mortgage REITs (REM) finished higher by 1.1%.

Consumer confidence in the U.S. surged to a 14-month high in April, consistent with recent economic data indicating that the U.S. continues to lead the early post-pandemic global economic recovery. The strong slate of corporate earnings reports and economic data this morning pushed the 10-Year Treasury Yield higher by 5 basis points to close at 1.62%. Homebuilders and the broader Hoya Capital Housing Index rallied to fresh record-highs again today after data this morning showed that home values rose by the most in fifteen years as robust demand continues to clash with record-low housing supply.

Commercial Equity REITs


Apartment: Sunbelt-focused NexPoint Residential (NXRT) finished lower today despite reporting strong results this morning, boosting its full-year guidance across the board. NXRT now sees full-year NOI growth of 3.6% at the midpoint of its range, up from its prior guidance midpoint of 3.0%. Rental revenues are now expected to rise by 4.9% this year, up from 4.7%. Core FFO is now expected to rise by 4.1% this year, up from 2.3%. We'll hear results from three coastal-focused REITs this afternoon with Equity Residential (EQR), UDR (UDR), and Essex Properties (ESS) all reporting earnings.

Outside of the troubled urban metros, national apartment markets have been remarkably resilient throughout the pandemic. On that theme, today we published Storage REITs: Urban Exodus Catalyzes Recovery. A topic that is particularly timely given the newly-released Census population data and Electoral College map, the "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. Catalyzed 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. Supply growth remains a concern, but construction spending has normalized as development yields compress. Rental rates surged in late 2020 while external growth opportunities should remain plentiful.

Timber: PotlatchDeltic (PCH) finished flat today after reporting strong results yesterday afternoon. Total revenues surged nearly 70% year-over-year and were up 5% from last quarter's record levels. Total adjusted EBITDDA - the most closely watched earnings metric - was four times higher than Q1 of 2020 as EBITDDA margins jumped to record-highs of 55%. CEO Eric Cremers commented, “2021 is off to an extraordinary start as our Wood Products and Timberlands businesses leveraged historic lumber prices to drive our third consecutive quarter of record financial performance.” Reignited by the red-hot U.S. housing market, timber REITs "caught fire" in late 2020 - both literally and figuratively - as lumber prices (LB1:COM) have soared to record-highs as insatiable demand from homebuilders has clashed with reduced supply levels.

Manufactured Housing: Sun Communities (SUI) gained 0.3% today after reporting strong results yesterday afternoon. SUI boosted its 2021 Core FFO/share guidance once again and now sees growth of 17.9% this year - up from its prior outlook of 15.3% - which would almost surely be among the best in the REIT sector. SUI also boosted its full-year same-store NOI growth outlook to 8.0% at the midpoint, up from its prior guidance of 6.1%, driven by an uptick in occupancy rates to record-high levels of 98.8% vs. 96.9% last year. Last week, Equity LifeStyle (ELS) reported similarly stellar results and boosted its full-year guidance for FFO growth to 9.7% - up from its prior outlook of 6.5% growth.

Healthcare: Lab-space operator Alexandria Realty (ARE) finished lower by 0.9% lower today despite reporting solid results yesterday afternoon. ARE lifted the midpoint of its 2021 FFO/share outlook to $7.73, implying growth of 5.9% this year up from its prior outlook of 5.5% growth. ARE also expects net operating income growth of 2.5% for the year at the midpoint, up from its previous midpoint of 2.0%; on a cash basis and sees GAAP NOI growth of 5.3% at the midpoint, up from its prior view of 5.0%. Fundamentals for several healthcare REIT sub-sectors have actually strengthened since the start of the pandemic including the lab space and skilled nursing facilities as government relief funds continue to pour into the healthcare sector.

Shopping Center: Weingarten (WRI) finished higher by 0.7% after reporting results yesterday afternoon, noting that rent collection improved to 95% in Q1. WRI - which entered into a merger agreement with Kimco (KIM) earlier this month to form the largest shopping center REIT - noted that its same-store NOI has continued to rebound over the last several quarters is now lower by just 0.6% on a year-over-year basis, up from its trough of -19.7% in Q2 of 2020. Strong leasing activity in the back-half of 2020 across the shopping center REIT sector confirmed that the long-term outlook for open-air strip centers remains far more promising than their enclosed regional mall peers. Retail Opportunity (ROIC) will report results this afternoon.

We'll also hear results this afternoon from net lease REIT Four Corners (FCPT), data center REIT QTS Realty (QTS), industrial REIT Eastgroup (EGP), and diversified REIT American Assets (AAT). 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 1.1% today to push their week-to-date gains to 1.2%. Commercial mREITs finished higher by 0.9% today and are now higher by 1.0% on the week. AGNC Investment (AGNC) rallied more than 2% today after the agency-focused mREIT reporting strong earnings results yesterday afternoon, noting that its Book Value Per Share ("BVPS") jumped 6% in Q1 to $17.72. Commercial mREIT KKR Real Estate (KREF) gained 2.5% today after reporting yesterday afternoon that its BVPS rose about 1% in Q1.

Elsewhere, Tremont Mortgage Trust (TRMT) - which is slated to report earnings results this afternoon - announced this morning that it will combine with RMR Mortgage Trust (RMRM) in an all-stock transaction that's intended to create a more diversified commercial mortgage REIT focused on middle-market transitional bridge loans. Each TRMT share will be converted into 0.520 of one RMRM share at an implied price of $6.55 per TRMT share, representing a 6% premium to the closing price on April 23.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.16% today, on average, but underperformed their respective common stock issues by an average of -0.38%. So far in 2021, REIT Preferred stocks are higher by 6.95% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.28% and trades at a slight premium to par value.

Economic Data This Week

Still to come this week on the economic data front, on Wednesday we'll hear commentary from the Federal Reserve at the conclusion of their FOMC meeting. On Thursday, we'll see the first look at first-quarter GDP as well as Pending Home Sales for March. Finally, on Friday, we'll get some inflation data with the Core PCE Index - the Fed's "preferred" inflation metric - and get a look at Personal Income and Spending data for March.

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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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