• Alex Pettee, CFA

REITs Lead • Rents Roar • Earnings Recap

Summary

  • U.S. equity markets finished broadly higher Thursday amid a frenzy of corporate earnings reports while the Biden Administration attempts to salvage a tax-and-spending plan that continues to face stiff opposition.

  • Bouncing back from broad-based declines yesterday, the S&P 500 gained 1.0% today while the Mid-Cap 400 and the Small-Cap 600 each rallied 1.6%.

  • Real estate equities were broadly higher today as earnings results continue to impress with the Equity REIT Index gaining 1.3% today with 18-of-19 property sectors in positive territory.

  • Sunbelt-focused apartment REIT Independence Realty (IRT) soared 5% after reporting strong results and raising its full-year outlook, noting that new lease rates jumped 19.8% in Q3 and accelerated to 24.1% in October.

  • Single-family rental operator Invitation Homes (INVH) rallied 2% after reporting another very strong quarter. New lease rates soared nearly 20% in Q3 - the highest on record - while lease rates on renewed tenants approach 10%.

Real Estate Daily Recap

U.S. equity markets finished broadly higher Thursday amid a frenzy of corporate earnings reports while the Biden Administration attempts to salvage a tax-and-spending plan that continues to face stiff opposition. Bouncing back from broad-based declines yesterday, the S&P 500 gained 1.0% today while the Mid-Cap 400 and the Small-Cap 600 each rallied 1.6%. Real estate equities were broadly higher today as earnings results continue to impress with the Equity REIT Index gaining 1.3% today with 18-of-19 property sectors in positive territory while Mortgage REITs slipped 0.4%.

All eleven GICS equity sectors were higher on the day, led to the upside by the Real Estate (XLRE), Consumer Discretionary (XLY), and Industrials (XLI) sectors. Following a 9 basis point decline yesterday, the 10-Year Treasury Yield climbed by 4 basis points today to close at 1.57% as investors access the fate of the Democrat's tax-and-spending agenda as the Biden Administration seeks to salvage a deal ahead of several key elections next week. Residential REITs and the broader Hoya Capital Housing Index were among the leaders today following strong results from several apartments and single-family rental operators and home building products components.

Equity REITs & Homebuilders

Apartments: As discussed today in our Real Estate Earnings Halftime Report, stellar results from residential REITs continue to be the key theme early in earnings season as rents continue to rise at the fastest rate on record across essentially every market. Independence Realty (IRT) soared 5% after reporting strong results and raising its full-year outlook. The Sunbelt-focused REIT reported that new lease rates jumped 19.8% in Q3 and accelerated to 24.1% in October and IRT now sees same-store NOI growth rising over 10% this year. Mid-America (MAA) and AvalonBay (AVB) were also among the leaders after reporting strong results yesterday afternoon. We'll hear results from Camden (CPT) and Apartment Income (AIRC) after the close today.

Single Family Rental: Invitation Homes (INVH) rallied 2% after reporting another very strong quarter and raised its full-year guidance across the board driven by stellar trends of double-digit rent growth across nearly all of its markets. New lease rates soared nearly 20% in Q3 - the highest on record - while lease rates on renewed tenants approach 10%. INVH boosted its full-year FFO growth outlook to 18.5% - up 560 basis points from its prior outlook and also raised its full-year same-store NOI target by 200 basis points to 9.0%.

Cell Tower: American Tower (AMT) - the largest REIT by market capitalization - finished higher by 0.2% today after reporting results this morning. AMT boosted its full-year guidance across the board, lifting its full-year AFFO growth outlook to 13.5% - up 160 bps from last quarter. Growth in its international markets has powered its performance in recent quarters as the impact of the Sprint/T-Mobile merger is expected to continue to weigh on domestic "organic" leasing results over the next several quarters.

Casino: The lone REIT to downwardly revise its FFO/share outlook so far, VICI Properties (VICI) gained 0.9% after reporting results yesterday afternoon. VICI increased its total full-year outlook FFO by 2%, but due to impact of $3.4B in equity issuance to fund its $4B acquisition of The Venetian, its full-year FFO per share growth outlook was revised down to 9.5% from its prior guidance of 12.5%. VICI commented that it expects its $17.2B acquisition of MGM Growth Properties (MGP) to be completed in the first half of 2021. We'll hear results from Gaming & Leisure Properties (GLPI) this afternoon.

Industrial: Duke Realty (DRE) was higher by 2.5% today after reporting strong results yesterday afternoon, rising its full-year FFO growth outlook to 13.8% - up 130 bps from last quarter. Duke also raised its full-year NOI growth outlook to 5.2% - up 20 basis points from last quarter. Industrial Logistics (ILPT) was also higher after reporting results that were roughly in line with estimates. ILPT does not provide full-year guidance. We'll hear results from Stag Industrial (STAG) and PS Business Parks (PSB) after the close today.

Data Center: CyrusOne (CONE) rallied 1.5% after reporting strong results yesterday afternoon and raising its full-year outlook. CONE raised its outlook to 3.8% - up 120 bps from last quarter and reported $38M in total bookings for the quarter, essentially in line with Q2 despite concerns that ongoing chip shortages may put downward pressure on data center demand. CoreSite (COR) was lower by 1.3% after reporting mixed results, noting that it booked $7M in incremental revenues for the quarter - also in line with the prior quarter - and maintained its full-year outlook which calls for FFO growth of 4.7%.

Storage: Following perhaps the most impressive quarter for any property sector on record in Q2, storage REITs got off to another strong start in Q3 with a "beat and raise" report from Extra Space (EXR), which rallied nearly 5% on the day. Incredibly, EXR now sees FFO growth of 28.8% in 2021 - up another 510 basis points from its prior outlook - and substantially above its initial 2021 guidance which called for mid-single-digit FFO growth this year. Closely linked to the rebound in multifamily rents, self-storage REITs' turnaround has been catalyzed by the ongoing housing boom and the acceleration in housing market turnover.

Office: We've now heard results from 10 of the 25 office REITs. While WFH headwinds clearly persist, the office REIT outlook has brightened in recent months and results thus far have continued the positive trends from Q2. Six of the eight REITs that provide guidance raised their full-year outlook with a particularly strong forecast from Boston Properties (BXP) which now sees 3.7% FFO growth this year and provided initial guidance calling for 12.7% FFO growth in 2022 which would be about 5% above the pre-pandemic baseline from 2019. Results from Piedmont (PDM) and Hudson Pacific (HPP) were also solid with each REIT boosting its full-year outlook by 200 basis points to 4.0% and 3.1%, respectively.

Last week, we published our Real Estate Earnings Preview. Real estate earnings season kicked into high gear this week with results from nearly 100 REITs and homebuilders this week. In addition to the aforementioned REITs reporting after the close today, the earnings slate this afternoon includes Cousins Property (CUZ), Corporate Office (OFC), Office Properties Income (OPI), Kite Realty (KRG), LTC Properties (LTC), Pebblebrook (PEB), and Washington REIT (WRE). Tomorrow morning, we'll see results from WP Carey (WPC) and Weyerhaeuser (WY).

Mortgage REITs

Mortgage REITs were mixed today as residential mREITs slipped 0.2% to push their weekly decline to 1.2%. Commercial mREITs gained 0.7% and are now higher by 0.1% this week. Redwood (RWT) rallied nearly 3% after reporting strong results yesterday afternoon, noting that its Book Value Per Share ("BVPS") rose nearly 5% in Q3. Annaly Capital (NLY) traded slightly lower today despite reporting solid results yesterday afternoon, noting that its BVPS increased modestly in Q3. Armour Residential (ARR) slipped about 1.5% today after reporting that its BVPS declined 1.4% last quarter. We'll hear results from Ladder Capital (LADR) and Orchid Island (ORC) this afternoon.

Earlier this week, we published Mortgage REITs: High Yield Is Back which previewed third-quarter earnings season. Consistent with the forecast, third-quarter results have been helped by favorable yield-curve movements with these REITs' Book Values Per Share ("BVPS") seeing a modest uptick from last quarter. Residential mREITs have reported a 0.4% average increase in BVPS while commercial mREITs have seen a 0.8% increase. 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 data concludes on Friday with a fresh look at inflation data with the PCE Price Index - the Fed's "preferred" gauge of inflation - which is expected to show that September recorded the highest annual rise in inflation in over 30 years. We'll also see Personal Income/Spending data on Friday along with a flurry of Purchasing Managers Index ("PMI") data.

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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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