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  • Alex Pettee, CFA

REIT Mega-Merger • Earnings Frenzy • U.S. Leads Recovery

Summary

  • U.S. equity markets rallied to fresh record-highs Thursday following a strong slate of corporate earnings results and economic data showing that the United States continues to lead the global economic recovery.

  • Pushing its week-to-date gains to nearly 1%, the S&P 500 finished higher by 0.7% today while the Mid-Cap finished flat and the Small-Cap 600 finished fractionally lower.

  • Real estate equities were among the leaders following a strong slate of REIT earnings results. The broad-based Equity REIT Index finished higher by 0.9% with 16-of-19 property sectors in positive-territory.

  • The animal spirits are alive in REIT world. Realty Income (O) announced that it will acquire Vereit (VER) in an all-stock deal to form a massive net lease REIT that will have a combined enterprise value of about $50B.

  • Sunbelt and suburban-focused housing REITs continue to report that rent growth is far stronger than pre-pandemic levels, tracking rising home values. Data center REIT earnings, however, have been fairly disappointing.

Real Estate Daily Recap

U.S. equity markets rallied to fresh record-highs Thursday following a strong slate of corporate earnings results and economic data showing that the United States continues to lead the global economic recovery. Pushing its week-to-date gains to nearly 1%, the S&P 500 ETF (SPY) finished higher by 0.7% today while the Mid-Cap 400 (MDY) finished flat and the Small-Cap 600 (SLY) finished fractionally lower. Real estate equities were among the better-performing equity sectors following a strong slate of REIT earnings results. The broad-based Equity REIT ETFs (VNQ) finished higher by 0.9% with 16-of-19 property sectors in positive territory while Mortgage REITs (REM) were flat.

While other global economies that pursued more damaging COVID-related lockdown measures are facing a dark decade ahead, GDP data this morning showed that the U.S. economy grew at a 6.4% annualized rate in Q1 - above expectations - and is set to regain all of the lost output from the pandemic later this year. Meanwhile, corporate earnings season remains on a record-setting pace with nearly 90% of companies beating EPS estimates. Nine of the eleven GICS equity sectors finished higher today while homebuilders and the broader Hoya Capital Housing Index gained following strong results from several homebuilders and residential REITs.

Commercial Equity REITs Net Lease: The animal spirits are alive in REIT world. Realty Income (O) announced that it will acquire Vereit (VER) in an all-stock deal to form a massive net lease REIT that will have a combined enterprise value of about $50B. As part of the deal, Realty Income plans to spin off VER's office properties into a new REIT. Vereit shareholders will get 0.705 shares of Realty Income per share of VER, equating to $48.29 per share, representing a 17% premium to VER's previous closing price. The merger is expected to close during Q4 2021 and the transactions are expected to add more than 10% to Realty Income's adjusted FFO per share in the first year.

Single Family Rental: The 'Burbs are back - and hotter than ever. Single-Family Rental REITs have been one of the top-performing property sectors over the past year amid a COVID-driven "suburban revival." Invitation Homes (INVH) jumped nearly 2% after reporting strong results yesterday afternoon. INVH reported that same-store NOI rose 4.4% year-over-year while occupancy rates climbed to fresh record-highs at 98.4%, up 170 basis points from last year. Most importantly, rental rate growth remains very strong as new lease rates rose by 7.9% and renewals rose by 4.4%, driving blended rent growth of 5.4%, up 200 basis points year over year. Revenue collections were approximately 98% of the Company's historical average collection rate. American Homes (AMH) reports results next Thursday.

Data Center: CoreSite (COR) declined by about 2% after it reported this morning that it signed $7.0m in incremental annual rents in Q1 - the lowest since 4Q19 - but maintained its full-year guidance with expectations of 3.0% growth. CyrusOne (CONE) finished lower by about 1.0% after it reported yesterday afternoon that it signed $35.4m in incremental annual rents in Q1 - down from $49m last quarter - and maintained its full-year guidance which calls for growth of 1.3%. Equinix (EQIX) finished flat after it reported another strong quarter yesterday afternoon with a 21% y/y increase in its AFFO/share, but maintained its full-year guidance which calls for growth of 9.0%. Digital Realty (DLR) reports this afternoon.

Cell Tower: American Tower (AMT) finished lower by about 0.5% after reporting Q1 results this morning. The largest REIT by market capitalization reported a solid quarter, boosting its full-year AFFO growth outlook to 9.0%, up from 9.4%. The company highlighted its recent acquisition of Telxius Towers - which it expects to be transformational for its European business - and the construction of nearly 2,000 new towers. AMT joined fellow cell tower REITs Crown Castle (CCI) and SBA Communications (SBAC) which all boosted full-year AFFO guidance this quarter which together are expected to average around 10%, up from the sector-leading growth of 8.6% last year.

Storage: Public Storage (PSA) finished higher by more than 2% after reporting very strong results yesterday afternoon and began issuing forward guidance for the first time. PSA projects Core FFO growth of 8.9% this year - which would be the strongest year of growth since 2016 - powered by same-store NOI growth of 6.1%. ExtraSpace (EXR) finished flat today despite reporting a strong quarter yesterday afternoon and raising its guidance across the board. EXR now sees Core FFO growth of 14.1% this year, up from its prior outlook of 12.7%, and increased its same-store NOI growth outlook to 7.0%. CubeSmart (CUBE) reports results this afternoon.

Shopping Center: Kimco (KIM) finished higher by about 1.5% today after reporting this morning that it collected 94% of rents in Q1 - up from 92% last quarter - and saw its same-store NOI growth improve sequentially to -5.7%. KIM - which announced a merger with Weingarten (WRI) earlier this month - also boosted its full-year FFO growth outlook to 6.0%, bouncing back from declines of -18.8% last year. Acadia Realty (AKR) finished higher by 0.6% today after reporting yesterday afternoon that it collected 92% of rents in Q1 and slightly boosted its full-year FFO growth outlook. Despite the boost, it still sees a -14.1% decline in FFO this year, the worst among shopping center REITs that have provided guidance. Kite Realty (KRG) reports this afternoon.

Apartment: Sunbelt-focused Mid-America (MAA) finished higher by nearly 1% after reporting yesterday afternoon that it recorded blended rent growth of 2.7% in Q1 - ahead of its pre-pandemic rent growth rate last year - and boosted its full-year AFFO growth outlook to 1.2%, up from 0.3%. Independence (IRT) declined by about 1% despite reporting that it saw blended lease rates up by 5.9% in Q1 - the best among REITs to report so far. AvalonBay (AVB) finished flat after reporting a modest improvement in rental trends in their coastal markets but still saw rental rates down by 5.5% in Q1. This afternoon, we'll hear results from Apartment Income (AIRC) and Camden Properties (CPT).

Additionally, we'll hear results this afternoon from casino REITs VICI Properties (VICI) and Gaming & Leisure Properties (GLPI), mall REIT Seritage Growth (SRG), hotel REIT Pebblebrook (PEB), and office REITs Columbia Properties (CXP) and Cousins (CUZ). 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 lower by 0.4% today but remain higher by 1.7% this week. Commercial mREITs finished lower by 0.2% today and are now higher by 1.0% on the week. Annaly Capital (NLY) gained about 0.5% after reporting that its tangible Book Value Per Share ("BVPS") rose $0.10 in Q1 to $8.93. Redwood Trust (RWT) finished lower by 0.5% despite reporting that its BVPS jumped 8.5% in Q1 to $10.76. Capstead Mortgage (CMO) dipped about 2% after reporting that its BVPS declined $0.10 in Q1 to $6.66.

NexPont Real Estate (NREF) was roughly flat today after reporting results this morning that showed that its BVPS increased to $20.33, up 4.4% in Q1. Finally, iStar (STAR) gained about 0.5% after reporting in-line results this morning. Orchid Island (ORC) reports results this afternoon and tomorrow we'll hear results from Ares Commerical (ACRE).


U.S. equity markets finished slightly lower Wednesday amid a busy slate of corporate earnings reports and after Fed Chair Powell reiterated the FOMC's commitment towards accommodative monetary policy. Trading in a relatively tight range all week, the S&P 500 ETF (SPY) finished fractionally lower today while the Mid-Cap 400 (MDY) finished fractionally higher and the Small-Cap 600 (SLY) gained 0.2%. REITs were mixed again amid a jam-packed 48 hours of earnings reports with more than 50 equity REITs reporting Q1 results. The broad-based Equity REIT ETFs (VNQ) finished lower by 0.2% with 12-of-19 property sectors in positive territory while Mortgage REITs (REM) finished higher by 0.6%.

Markets had little reaction to comments from Fed Chair Powell, who reiterated that the FOMC sees the recent inflationary pressure as "transitory" and that it believes that “substantial further progress” in economic growth is needed before the Fed would begin tightening monetary policy conditions. 4 of the 11 GICS equity sectors finished higher on the day, led to the upside by the Energy (XLE) sector, which jumped after data showed a jump in oil demand. Homebuilders and the broader Hoya Capital Housing Index were mixed today ahead of a busy slate of housing-related earnings results this afternoon.

Commercial Equity REITs

Apartment: The trio of coastal-focused apartment REITs that reported results yesterday afternoon - Equity Residential (EQR), Essex Property (ESS) and UDR Inc (UDR) - revealed that rental trends in urban markets are gradually improving. EQR and UDR both boosted full-year guidance across the board while ESS held guidance steady. EQR - which reported the weakest trends in 2020 - has seen a mild improvement in rent growth but leasing spreads were still -12.1% lower on a year-over-year basis in Q1 while ESS reported -6.2% spreads. UDR - which has lower exposure to the troubled urban markets - saw spreads turn positive in Q1. Mid-America (MAA), AvalonBay (AVB), and Independence (IRT) report this afternoon.

Industrial: EastGroup (EGP) finished higher by about 1% today after reporting strong results yesterday afternoon, consistent with the "beat-and-raise" reports seen across the logistics sector thus far this earnings season. EGP boosted its full-year FFO growth outlook to 7.6%, up from 5.6% in the prior outlook, and now projects same-store NOI growth of 4.4%, up from 4.0% in the prior outlook. In Logistics REITs: Sorry, Out of Stock, we discussed the fragility of global supply chains how that's translating into insatiable demand for industrial real estate space. We'll hear results from Duke Realty (DRE) this afternoon.

Shopping Center: Retail Opportunity (ROIC) finished lower by about 1.5% today after reporting results yesterday afternoon. ROIC reported that it collected 92% of rent in Q1 - steady with the prior quarter - but slightly below its peers which have reported collection rates of 95% or above. Same-store NOI declined by -5.6% on a year-over-year basis, an improvement from the -8.8% decline last quarter. While rent collection has improved considerably across the sector, it remains a few percentage points below "normal" levels at roughly 95%. Acadia Realty (AKR) will report results this afternoon.

Storage: ExtraSpace (EXR) and Public Storage (PSA) report results this afternoon. As discussed yesterday in Urban Exodus Catalyzes Recovery, driven 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. This "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. Supply growth remains a concern, but construction spending has normalized as development yields compress. Rental rates surged in late 2020 and we'll see if the momentum can continue.

Data Center: QTS Realty (QTS) finished roughly flat today after reporting results yesterday afternoon. QTS reported that it signed $20.6 million in leases in Q1, which was roughly in line with estimates following a record-high quarter of leasing activity in the prior quarter. Data Center REITs were the best-performing REIT sector in 2020, riding the "work-from-home" tailwinds that powered a surge in cloud spending. Leasing activity - the most closely watched earnings metric - surged to record-highs in the fourth quarter, eclipsing the prior record set in the second quarter, powered by robust and growing demand from the hyperscalers which continue to lean heavily on these REITs to build capacity. CyrusOne (CONE) and Equinix (EQIX) will report results this afternoon.

Office: Urban-focused Boston Properties (BXP) finished lower by roughly 0.5% today after reporting results yesterday afternoon which showed that leasing activity in urban metros has picked up a bit in recent months even as data from Kastle Systems continues to show that office utilization levels have not meaningfully recovered over the last six months in the largest U.S. cities - New York City, Chicago, Washington DC, and San Francisco. Sunbelt-focused Highwoods (HIW) gained 1.7% after reporting stronger results and boosted its full-year FFO and NOI guidance. This afternoon, we'll hear results from Paramount (PGRE), Piedmont (PDM), Empire State Realty (ESRT), Washington REIT (WRE), and Kilroy (KRC).

We'll also hear results this afternoon from net lease REIT Getty Realty (GTY), single-family rental REIT Invitation Homes (INVH), healthcare REIT Welltower (WELL), and hotel REIT Hersha (HT). 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 1.0% today to push their week-to-date gains to 2.1%. Commercial mREITs finished higher by 0.2% today and are now higher by 1.3% on the week. Dynex Capital (DX) jumped nearly 2% after reporting this morning that it recorded a total economic return of 7.2% in Q1 as its BVPS rose by 99 cents to $20.07. Tremont Mortgage Trust (TRMT) declined by about 1% after reporting yesterday afternoon that its BVPS rose 1.8% in Q1. Blackstone Mortgage (BXMT) dipped 1.7% today after reporting this morning that its BVPS was roughly flat in Q1.

This afternoon, we'll hear results from Capstead Mortgage (CMO), Annaly Capital (NLY), and Redwood Trust (RWT) and we'll hear results tomorrow from NexPont Real Estate (NREF), Orchid Island (ORC), and iStar (STAR).

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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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