• Alex Pettee, CFA

Rents Soar • Yields Slip • REIT Earnings

Summary

  • U.S. equity markets pulled back from yesterday's record-highs as investors digest a frenetic slate of earnings reports that have, so far, pushed back on concerns about stagflation and slowing growth.

  • Still hanging on to modest week-to-date gains of 0.2%, the S&P 500 declined 0.5% today while the Mid-Cap 400 slipped 1.6% and the Small-Cap 600 dipped 2.0%.

  • Real estate equities were mostly lower today as well despite a strong slate of earnings results over the last 24 hours with the Equity REIT Index declining 0.8% today.

  • Stellar results from residential REITs have been one of the key themes early in earnings season as rents continue to rise at the fastest rate on record across essentially every segment of every market.

  • The REIT earnings slate this afternoon includes ExtraSpace (EXR), Invitation Homes (INVH), and VICI Properties. Tomorrow morning, we'll hear from American Tower (AMT) and CoreSite (COR).

Real Estate Daily Recap

U.S. equity markets pulled back from yesterday's record-highs as investors digest a frenetic slate of earnings reports that have, so far, pushed back concerns about stagflation and slowing growth. Still hanging on to modest week-to-date gains of 0.2%, the S&P 500 declined 0.5% today while the Mid-Cap 400 slipped 1.6% and the Small-Cap 600 dipped 2.0%. Real estate equities were mostly lower today as well despite a strong slate of earnings results over the last 24 hours with the Equity REIT Index declining 0.8% today with 16-of-19 property sectors in negative territory while Mortgage REITs declined 0.8%.

After climbing to four-month highs last week, the 10-Year Treasury Yield slid by the most in over a month today, dipping 9 basis points to close at 1.53%, fueled in part by an ongoing stalemate in the Democrat's tax-and-spending agenda as the Biden Administration seeks to salvage a deal ahead of several key elections next week. Ten of the eleven GICS equity sectors were lower today, dragged on the downside by the Energy (XLE) and Financials (XLF) sectors as concerns over slowing growth in China have put downward pressure on recently-soaring Commodities (DJP) prices this week.

Equity REITs & Homebuilders

Apartments: Stellar results from residential REITs have been one of the key themes early in earnings season as rents continue to rise at the fastest rate on record across essentially every segment of every market. Each of the three major apartment REITs that have reported results significantly raised their full-year outlook. Equity Residential (EQR) gained 1% after a beat-and-raise report, noting that it saw blended rental rates accelerating to 7.6% in Q3 and 9.8% so far in October. Essex Properties (ESS) and UDR (UDR) noted similar trends with blended rents accelerating to 13.5% and 11.5% through October. We'll hear results from AvalonBay (AVB), Independence Realty (IRT), and Mid-America (MAA) after the close today.

Industrial: Eastgroup (EGP) gained roughly 1% today after reporting strong results and raising its full-year guidance. Underscoring the continued imbalance between supply and demand in the industrial sector, EGP recorded a 37.4% surge on rental rates on new and renewed leases. EGP now sees full-year FFO growth at 12.1% at the midpoint of its range, up 280 basis points from its prior outlook, and sees same-store NOI growth of 5.6%, up 50 basis points from its prior outlook. We'll hear results from Duke Realty (DRE) and Industrial Logistics (ILPT) this afternoon.

Shopping Center: Results over the last 24 hours from shopping center REITs have been decent but didn't match the strong report earlier in the week from Site Centers (SITC). Results from Acadia (AKR), Retail Opportunities (ROIC), and Whitestone (WSR) echoed similar themes of a full "normalization" in rent collection, but comparable metrics are likely to get harder to beat in the quarters ahead as each of the three REITs saw its same-store NOI growth decelerate from last quarter.

Data Center: Digital Realty (DLR) traded flat today after reporting results yesterday afternoon that were roughly in line with estimates. On the most closely-watched leasing metric, DLR signed total bookings of $113M of annualized GAAP rental revenue in the quarter, matching last quarter's pace. DLR modestly raised its full-year revenue and FFO outlook, but weak pricing trends offset the otherwise strong report as rental rates on renewal leases rolled down 5.6% on a cash basis. We'll hear results from CyrusOne (CONE) after the close today.

Last week, we published our Real Estate Earnings Preview. Real estate earnings season kicks 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 ExtraSpace (EXR), Invitation Homes (INVH), and VICI Properties. Tomorrow morning, we'll hear from American Tower (AMT), CoreSite (COR), and Medical Properties (MPW).

Mortgage REITs

Mortgage REITs were mixed today as residential mREITs slipped 0.3% to push their weekly decline to 1.0%. Commercial mREITs declined 0.7% and are now lower by 0.5% this week. Blackstone Mortgage (BXMT) and Dynex Capital (DX) were each little changed today after reporting results this morning that were roughly in line with expectations. We'll hear results this afternoon from Armour Residential (ARR), Redwood (RWT), Annaly Capital (NLY). The average residential mREIT now pays a dividend yield of 8.4% while the average commercial mREIT pays a dividend yield of 6.5%.

Yesterday, we published Mortgage REITs: High Yield Is Back. Mortgage REITs - which endured punishing declines of 50-70% during the peak of the pandemic - have rallied back from the brink since mid-2020 to within shouting distance of record highs. The pandemic-driven wave of dividend cuts has given way to a frenzy of dividend hikes this year with 25 mREITs increasing their payouts, pushing the average yield to nearly 8%. After a sharp recovery, mREIT Book Values trended sideways in early 2021 amid declining interest rates and yield curve tightening, but third-quarter results should be helped by favorable yield-curve movements.

Economic Data This Week

The busy week of economic data continues on Thursday with Pending Home Sales data for September as well as the first look at third-quarter Gross Domestic Product. On Friday, we'll get 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 throughout the week.

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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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