• Alex Pettee, CFA

REITs Lag • Earnings Peak • Industrial M&A

Summary

  • U.S. equity markets were mixed Wednesday following a busy slate of earnings results and after employment data from ADP missed estimates, adding weight to concerns over a tightening labor market.

  • Now off by about 0.5% week-to-date, the S&P 500 finished fractionally higher today while the Mid-Cap 400 declined by 0.2% and the Small-Cap 600 was flat.

  • Real estate equities were laggards today despite a generally strong slate of earnings results and M&A news over the last 24 hours. The broad-based Equity REIT Index finished lower by 1.7%.

  • Another day, another major M&A deal in the REIT sector. Office REIT Equity Commonwealth (EQC) will acquire industrial REIT Monmouth Industrial (MNR) in an all-stock deal valued at approximately $3.4 billion.

  • We're at the peak of REIT earnings season with roughly 50 REITs reporting results over the next 24 hours. Storage REITs concluded an impressive quarter while mall REITs start reporting this afternoon.

Real Estate Daily Recap

U.S. equity markets were mixed Wednesday following a busy slate of earnings results and after employment data from ADP missed estimates, adding weight to concerns over a tightening labor market. Now off by about 0.5% week-to-date, the S&P 500 ETF (SPY) finished fractionally higher today while the Mid-Cap 400 (MDY) declined by 0.2% and the Small-Cap 600 (SLY) was flat. Real estate equities were laggards today despite a generally strong slate of earnings results and M&A news over the last 24 hours. The broad-based Equity REIT ETFs (VNQ) finished lower by 1.7% with 18-of-19 property sectors in negative territory while Mortgage REITs (REM) gained by 0.4%.

The Energy (XLE), Materials (XLB), and Financials (XLF) sectors led the way again today among GICS equity sector while interest-rate-sensitive segments of the equity market - including Real Estate (XLRE) and Utilities (XLU) were under pressure today amid a continued focus on commodity price pressures. The 10-Year Treasury Yield briefly climbed back above 1.62% before ending the day lower by 2 basis points. Homebuilders and the broader Hoya Capital Housing Index finished slightly lower today ahead of results this afternoon from Redfin (RDFN) and Rocket (RKT), among others.

Commercial Equity REITs

Yesterday, we published our REIT Earnings Halftime Report. The major themes this quarter have been "Beat and Boost" and the revival of long-dormant "Animal Spirits." Nearly 90% of REITs have topped consensus earnings estimates. Of the 65 REITs and homebuilders that provide full-year guidance, nearly two-thirds have raised their full-year estimates. Positive surprises thus far in Q1 have been primarily in the residential REIT sectors where self-storage, manufactured housing, and sunbelt-focused apartment REITs have reported stellar results. Below is the updated Earnings Scorecard.

Industrial: Another day, another major M&A deal in the REIT sector. Equity Commonwealth (EQC) and Monmouth Industrial (MNR) announced that they have entered into a merger agreement by which Equity Commonwealth will acquire Monmouth in an all-stock transaction, valued at approximately $3.4 billion, including the assumption of debt. MNR shareholders will receive 0.67 shares of EQC for every share of MNR for total consideration of $19.58/share. MNR jumped about 6% on the day while EQC dipped 4%.

Storage: The impressive quarter concluded with strong results from Life Storage (LSI) and National Storage (NSA). As with their storage peers, LSI and NSA both boosted their FFO guidance and same-store NOI outlook. LSI now sees Core FFO growth of 10.1% this year - up from its prior outlook of 6.5% - driven by same-store NOI growth of 6.0%. NSA sees FFO growth of 11.7% - up from 7.0% - driven by NOI growth of 7.0%. As discussed in our storage sector report last week, 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.

Shopping Center: Retail Properties of America (RPAI) declined about 2% today despite reporting improving results yesterday afternoon and raising its full-year outlook. RPAI collected 96% of rents in Q1 and boosted its full-year FFO growth outlook to 1.2%, up from its prior outlook for a decline of -4.8%. Retail Value (RVI) jumped about 2% after reporting that it collected 96% of rents in Q1 and sees sequential improvement in NOI. RVI recorded the steepest decline in FFO growth in 2020 and saw its share price plunge nearly 60% last year. Whitestone (WSR) dipped 6% today after missing FFO estimates and reporting only a mild sequential improvement in its same-store NOI growth. We'll hear results this afternoon from Federal Realty (FRT) and RPT Realty (RPT).

Healthcare: Healthpeak (PEAK) declined about 3% despite boosting its full-year FFO outlook, driven by strong growth in its life sciences segment, offsetting sharp declines in its remaining senior housing portfolio. Senior housing-focused New Senior (SNR) dipped more than 3% today after reporting a decline in same-store NOI of 16.0% for Q1, worse than the -9.6% decline reported in the prior quarter. Medical office-focused Physicians Realty (DOC) declined by about 2% after reporting same-store NOI growth of 2.4%. Global Medical REIT (GMRE), Healthcare Realty (HR), Sabra Healthcare (SBRA), and Diversified Healthcare (DHC) all report results this afternoon.

Net Lease: Broadstone (BNL) finished lower despite reporting that it collected more than 99% of rents in Q1 and boosted its full-year FFO outlook, just the third net lease REIT to do so this quarter thus far. Spirit Realty (SRC), American Finance (AFIN), and EPR Properties (EPR) report earnings results this afternoon.

Hotels: Host Hotels (HST) finished slightly lower today after reporting that its occupancy rate averaged about 27% in Q1, up from 19% in the prior quarter. HST also announced that it has acquired Four Seasons Resort Orlando at Walt Disney World Resort for approximately $610 million. Ashford Hospitality (AHT) dipped nearly 5% after reporting a mild improvement in occupancy rates to 42% in Q1, up from about 33% in the prior quarter. Braemar Hotels (BHR) reports this afternoon.

In addition to the aforementioned reports, we'll also hear results this afternoon from prison REIT CoreCivic (CXW), office REIT Hudson Pacific (HPP), timber REIT Rayonier (RYN), mall REIT Tanger Outlets (SKT).

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.0% today and are now higher by 0.1% this week. Commercial mREITs finished higher by 0.1% but remain off by 0.9% this week. Chimera (CIM) jumped more than 4% today after reporting solid results and boosting its dividend by 10% to $0.33/share. Hannon Armstrong (HASI) dipped about 2% after reporting mixed results but providing guidance that it expects to grow EPS 7%-10% per year from 2021 to 2023. TPG Real Estate (TRTX) gained about 1% and New Residential (NRZ) declined by 1% after reporting results in line with expectations. We'll hear results this afternoon from Invesco Mortgage (IVR) and Two Harbors (TWO).

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.06% today, on average, and outperformed their respective common stock issues by an average of 0.62%. So far in 2021, REIT Preferred stocks are higher by 7.27% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.27% and trades at a slight premium to par value.

Economic Data This Week

The busy week of employment data continues with Jobless Claims on Thursday and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of nearly 1,000,000 in April following similarly-sized gains last month as temporarily unemployed workers return to the labor force. We also saw Construction Spending data on Monday, and a flurry of Purchasing Managers' Index (PMI) data throughout the week.

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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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