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  • Alex Pettee, CFA

Tax Hike Worries • Housing Shortage • REIT Earnings

Summary

  • U.S. equity markets retreated Thursday on reports that President Biden is considering doubling the top capital gains tax rate while investors parsed a busy slate of corporate earnings reports.

  • Pulling its week-to-date declines to 1.2%, the S&P 500 declined by 0.9% today while the Mid-Cap 400 pulled back by 0.5% and the Small-Cap 600 declined by 0.6%.

  • Real estate equities were mostly lower - but were still among the outperformers - with the broad-based Equity REIT Index finishing lower by 0.5% with 15-of-19 property sectors in negative-territory.

  • Housing Shortage: Existing Home Sales data showed that the median sales price in March rose by a record-breaking annual pace of 17.2% with all regions posting double-digit price gains. Properties typically sold in 18 days, a record low.

  • Cell tower REIT Crown Castle (CCI) and homebuilders DR Horton (DHI) and Tri Pointe (TPH) all reported impressive "beat-and-raise" earnings results over the last 24 hours. Office and retail REITs reported mixed results.

Real Estate Daily Recap

U.S. equity markets retreated Thursday on reports that President Biden is considering doubling the top capital gains tax rate while investors parsed a busy slate of corporate earnings reports and economic data. Pulling its week-to-date declines to 1.2%, the S&P 500 ETF (SPY) declined by 0.9% today while the Mid-Cap 400 (MDY) pulled back by 0.5% and the Small-Cap 600 (SLY) declined by 0.6%. Real estate equities were mostly lower - but were still among the outperformers - with the broad-based Equity REIT ETFs (VNQ) finishing lower by 0.5% with 15-of-19 property sectors in negative territory while Mortgage REITs (REM) finished lower by 0.2%.

Equity markets turned lower mid-day on the tax hike reports after flirting with fresh intra-day records earlier in the session following better-than-expected jobless claims data and continued stabilization in the 10-Year Treasury Yield. All eleven GICS equity sectors finished lower on the day, dragged on the downside by the Materials (XLB) and Energy (XLE) sectors. Homebuilders and the broader Hoya Capital Housing Index finished lower despite a "beat-and-raise" quarter from homebuilders DR Horton (DHI) and Tri Pointe (TPH) which each continue to sell homes as quickly as they can be built.

Existing Home Sales were slightly below expectations in March as historically low inventory levels have clashed with robust demand. Existing-home sales fell 3.7% from the prior month but were still higher by 12.3% from last year. The median existing-home sales price in March rose by a record-breaking annual pace of 17.2% to a historic high of $329,100, with all regions posting double-digit price gains. Properties typically sold in 18 days, a record low. This report was broadly consistent with data last week from Redfin (RDFN) which showed that a record 43% of homes were sold above their listing price over the past month while active listings fell to new all-time lows. Nearly half of listed homes received an offer within one week, also a record-high.

Commercial Equity REITs

Today, we published REIT Dividend Revival: Earnings Preview. Real estate earnings season kicks off this week and we'll see results from more than 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies over the next month. REITs are off to a hot start to 2021 with a record-setting quantity of dividend increases. 51 equity REITs and 17 mortgage REITs have raised their dividends this year. Results from the handful of REITs to report results thus far have been impressive. In this report, we discussed the themes and metrics we'll be watching across all of the major real estate property sectors this earnings season.

Cell Tower: Crown Castle (CCI) finished higher by 0.7% after kicking off cell tower REIT earnings season yesterday afternoon with another strong beat-and-raise report. CCI boosted its full-year AFFO growth guidance to 11.3% from 9.7% last quarter and raised its property revenue growth guidance to 7.0% from 4.4% last quarter. Emerging from relative obscurity early last decade, Cell Tower REITs have developed into dominant players of both the telecommunications and real estate sectors through relentless growth. After uncharacteristically lagging early this year, Cell Tower REITs - along with other "essential" property sectors - have led the recent leg of the REIT rally over the past month. We'll hear results from American Tower (AMT) and SBA Communications (SBAC) next week.

Industrial: Three reports, three "beat and raises." Rexford (REXR) and First Industrial (FR) each reported similarly strong results on Wednesday afternoon, boosting their full-year same-store NOI outlook by 75 basis points and 50 basis points, respectively. These strong reports followed Prologis' (PLD) report on Tuesday in which the logistics giant boosted its 2021 guidance across all metrics. Earlier this week, we published Logistics REITs: Sorry, Out of Stock. The coronavirus pandemic has exposed the fragility of global supply chains and demand for industrial real estate space remains insatiable as businesses scramble to invest in logistics resiliency.

Shopping Center: SITE Centers (SITC) declined by about 2% today after reporting Q1 results this morning in which it noted that it collected 96% of Q1 rents - not quite fully "normalized." SITC reported a 1.4% year-over-year decline in same-store NOI in Q1, continuing an uptrend from its trough of -19.1% in Q2 2020. Occupancy rates ticked down slightly to 91.4% from 91.6% last quarter, but leasing spreads were decent with new leasing spreads of 8.3% and renewal leasing spreads of 0.9% for the trailing twelve-month period. SITC reduced its full-year guidance for FFO, but increased its Operating FFO guidance to reflect the redemption of its Class K Preferred Shares (SITC.PK).

Office: New York City-focused SL Green (SLG) finished lower by 2.4% today after reporting mixed results, noting that it collected 98% of rents from its office tenants, but just 85% of rents from its retail tenants, amounting to an overall collection rate of 95.3%. Brandywine (BDN) declined by about 1% after reporting results that were in line with expectations and maintained its full-year FFO guidance which calls for a decline of -1.4% at the midpoint. A year into the pandemic, office utilization in major U.S. cities remains a fraction of pre-pandemic levels with coastal cities facing a particularly slow recovery.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.2% today and are now off by -1.2% on the week. Commercial mREITs finished fractionally higher but remain lower by -0.9% this week. ARMOUR Residential (ARR) finished higher by 0.4% after kicking off mREIT earnings season on Wednesday afternoon with mixed results, noting that its Book Value Per Share ("BVPS") was essentially flat in Q1. This afternoon, we'll hear results from Apollo Commerical (ARI).

Mortgage REIT earnings season hits high gear next Monday with results from KKR Real Estate (KREF), and AGNC Investment (AGNC). Riding the strength of the housing market, residential mREITs reported continued stabilization last quarter following the dramatic declines earlier in the pandemic. Conditions have been more stable throughout the pandemic on the commercial side, particularly for the REITs focused on lending to the "less COVID sensitive" property sectors.


REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished flat today, on average, but outperformed their respective common stock issues by an average of 0.53%. So far in 2021, REIT Preferred stocks are higher by 6.40% on a price-return basis and the average REIT preferred currently pays a dividend yield of 6.29% and trades at a slight discount to par value.

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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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