Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REITs Lead • Volatility Recedes • Earnings Updates

Summary

  • U.S. equity markets remained near record-highs Tuesday as investors parsed a busy slate of corporate earnings reports and evolving economic forecasts ahead of a closely-watched CPI inflation report tomorrow morning.

  • Following gains of 0.7% yesterday, the S&P 500 finished lower by 0.1%, snapping a six-day winning streak, while the Dow Jones Industrial Average finished lower by 10 points.

  • Real estate equities were mostly higher today amid a busy slate of REIT earnings as the broad-based Equity REIT ETFs gained 0.4% today with 13-of-19 property sectors in positive territory.

  • Simon Property (SPG) finished higher by 3.7% after providing a confident outlook on the high-end retail space. SPG recorded a sharp -24.3% decline in FFO per share in full-year 2020, but sees FFO bouncing back by 5.6% at the midpoint of its 2021 guidance range.

  • Industrial REIT EastGroup (EGP) reported strong results this afternoon while coastal apartment REIT UDR Inc (UDR) reported results that suggest a stabilization in urban rents in early 2021.

Real Estate Daily Recap

U.S. equity markets remained near record-highs Tuesday as investors parsed a busy slate of corporate earnings reports and evolving economic forecasts ahead of a closely-watched CPI inflation report tomorrow morning. Following gains of 0.7% yesterday, the S&P 500 ETF (SPY) finished lower by 0.1%, snapping a six-day winning streak, while the Dow Jones Industrial Average (DIA) finished lower by 10 points. Real estate equities were mostly higher today amid a busy slate of REIT earnings as the broad-based Equity REIT ETFs (VNQ) gained 0.4% today with 13-of-19 property sectors in positive territory while Mortgage REITs (REM) pulled back by 0.7%.

A sense of "normalcy" has returned to financial markets following the incredible short squeeze frenzy in late January as the CBOE Volatility Index (VIX) is back on the cusp of the lowest levels since the start of the pandemic. Meanwhile, recent coronavirus data continues to show highly encouraging trends as case counts and hospitalizations continue to receede rapidly. Six of the eleven GICS equity sectors finished on the upside today led by the Commerical Real Estate (XLRE), Communications (XLC), and Industrials (XLI) sectors. Residential REITs led the Hoya Capital Housing Index to the upside as well ahead of results from several housing REITs this afternoon.

Real Estate Earnings Update

Today, we published Casino REITs: Rolling The Dice. One of the top-performing property sectors last year, Casino REITs delivered surprisingly steady performance in 2020 despite the temporary closure and dramatically reduced usage of casino facilities throughout the pandemic. Unlike hotel REITs, casino REITs typically own properties under a long-term, triple-net master lease structure, leaving most of the financial and operational risk to their tenants - the casino operators. With an average dividend yield above 5%, we view the casino REIT sector as a compelling alternative to other more troubled property sectors. Selectivity is critical, and we prefer the "destination" casinos and tenant operators with a solid foothold into the online gaming ecosystem.

Real estate earnings season kicks into high gear this week with roughly four dozen REITs reporting results along with a handful of housing companies. Last week, we published REIT Earnings Preview: Who Paid The Rent? While missed rents and dividend cuts were the prevailing themes in the REIT sector in mid-2020, the vaccine-driven sector rotation has been the dominant theme over the past quarter. Normalizing rent collection and positive dividend commentary could be a positive catalyst to continue the recovery. We expect a historic year for dividend increases following the wave of cuts last year.

Malls: Simon Property (SPG) finished higher by 3.7% today after reporting yesterday afternoon that it collected 90% of Net Billed Rents in Q2 through Q4, but this amounted to just 74% of Gross Contractual Rents, resulting in a -17.1% decline in full-year net operating income ("NOI") including a -23.9% year-over-year dip in Q4. SPG recorded a -24.3% decline in FFO per share in full-year 2020, but sees FFO bouncing back by 5.6% at the midpoint of its 2021 guidance range. While SPG notes that it "feels confident we have turned the corner," forward-looking metrics still look concerning as leasing spreads remain under pressure at -6.8%, the worst quarter on record or Simon, while occupancy rates declined by a sizable 3.8 percentage-points to 91.3%.

Apartments: Coastal-focused REIT UDR Inc (UDR) reported results this afternoon. Consistent with the coastal vs. sunbelt divergence we noted last week, UDR reported that its same-store NOI growth declined by -5.4% in full-year 2020 and sees another tough year ahead with a -2.0% decline forecast for 2021. Rental trends have been far steadier for UDR that its coastal peers, however, as blended leasing rates were lower by a modest 0.3% in Q4 and actually turned positive in January, an encouraging sign that the worst of the downward pressure to rental rates in coastal markets appears to be over.

Industrial: EastGroup (EGP) is flat after-hours after reporting results this afternoon. EGP reported that its full-year FFO growth was 8.0% in 2020 and sees another 5.6% growth in 2021 at the midpoint as the industrial REIT collected over 99.5% of rents throughout the year. Consistent with reports last week from Prologis (PLD) and Duke Realty (DRE), EGP sees 4.0% growth in same-store NOI in 2021 while its full-year growth in 2020 came in above prior guidance at 3.2%. DRE also noted that leasing spreads averaged 15.4% in the fourth-quarter and 21.7% for full-year 2020 as demand remains red-hot.

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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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