• Alex Pettee, CFA

Vegas Merger • REIT Earnings • Dividend Boosts

Summary

  • U.S. equity markets were mixed Wednesday after disappointing ADP employment data and hawkish commentary from Federal Reserve officials pressured economically-sensitive equity sectors.

  • Clinging on to modest week-to-date gains, the S&P 500 slipped by 0.4% today while the Mid-Cap 400 declined by 1.0% and the Small-Cap 600 dipped 1.7%.

  • Real estate equities were mixed today amid a frenetic stretch of earnings reports as the Equity REIT Index declined by 0.3% with 14-of-19 property sectors in negative territory.

  • Ready to roll the dice? VICI Properties (VICI) - the largest casino REIT - announced plans to acquire MGM Growth Properties (MGP) to form one of the largest REITs with an enterprise value of nearly $50B.

  • Prison REIT GEO Group (GEO) surged after raising its full-year FFO outlook. GEO now sees its AFFO rising by 1% this year versus initial expectations of a -19% decline.

Real Estate Daily Recap

U.S. equity markets were mixed Wednesday after disappointing ADP employment data and hawkish commentary from Federal Reserve officials pressured economically-sensitive equity sectors. Clinging on to modest week-to-date gains, the S&P 500 slipped by 0.4% today while the Mid-Cap 400 declined by 1.0% and the Small-Cap 600 dipped 1.7%. The tech-heavy Nasdaq 100 finished higher by 0.2%. Real estate equities were mixed today amid a frenetic stretch of earnings reports as the Equity REIT Index declined by 0.3% with 14-of-19 property sectors in negative territory while Mortgage REITs declined 1.1%.

Concerns over the outlook for global economic growth - driven by ongoing struggles with the COVID delta variant - pressured commodity prices today and briefly sent the 10-Year Treasury Yield below 1.15% before rebounding to close roughly unchanged from yesterday. Nine of the eleven GICS equity sectors finished lower today, dragged on the downside by the economically-sensitive Energy (XLE) and Industrials (XLI) sectors.

Real Estate Earnings Updates

Casino: Ready to roll the dice? VICI Properties (VICI) - the largest casino REIT - announced plans to acquire MGM Growth Properties (MGP) to form one of the largest REITs with an enterprise value of nearly $50B. One of a handful of REIT-REIT consolidations announced over the last quarter, MGP shareholders will receive 1.366 shares of newly issued VICI stock - a 15.9% premium to MGP's closing stock price on Aug. 3. MGM Resorts (MGM) - MGP's controlling shareholder - will receive $43.00/ unit in cash for the redemption of the majority of its OP units and will keep 12M units in a newly formed OP of VICI. VICI expects the deal to be immediately accretive to AFFO per share, and also announced a 9.1% increase in its quarterly dividend to $1.44.

Storage: Boy, that escalated quickly. The trio of storage REITs that reported results yesterday afternoon confirmed the dramatic reacceleration in operating performance across the sector. Public Storage (PSA) boosted its same-store FFO growth outlook by 510 bps to 14.0% and its NOI growth outlook by 450 bps to 10.7%. Life Storage (LSI) raised its FFO growth outlook by 930 bps to 19.4% and its NOI outlook by 800 bps to 14.0%. Not to be outdone, National Storage (NSA) raised its FFO growth outlook by 1,260 bps to 24.3% and its NOI growth outlook by 900 bps to 16.0%.

Mall: Macerich (MAC) slid 5% after reporting mixed Q2 results and marginally lowering its full-year FFO outlook calling for a -13.7% decline in its FFO/share in 2021. Echoing the theme of SPG's report earlier in the week, however, MAC reported stabilizing occupancy rates and a solid 10.4% year-over-year jump in its same-store NOI in Q2. Tanger Outlets (SKT) also slid 3.5% despite reporting that foot traffic in Q2 surpassed the same period in 2019 and boosting its full-year FFO growth outlook. SKT now expects FFO/share to decline by -1.3% in 2021 versus its Q1 outlook which called for a -5.7% decline. Pennsylvania REIT (PEI) reports results tomorrow morning.

Prison: GEO Group (GEO) surged nearly 10% today after reporting better-than-expected Q2 results and raising its full-year FFO outlook. Remarkably, GEO now sees its AFFO rising by 1.2% this year versus its initial 2021 guidance which called for a decline of -19.1%. GEO did not comment on the status of its corporate structure evaluation on whether it will continue to operate as a REIT or transition to a C-corp. Along with fell prison operator CoreCivic (CXW) - which reports results net week - prison operators have rebounded in recent months as the Biden agenda - and hopes for a repeat of its 2020 electoral performance in 2022 - has sputtered amid concerns over COVID and inflation.

Net Lease: Spirit Realty (SRC) was among the outperformers today after report solid Q2 results and boosting its dividend by 2% to 0.638 per share. Lifted by a recovery in rent collection to roughly 99%, SRC now sees AFFO/share growth of 10.8% this year, up 570 bps from its prior outlook. Broadstone (BNL) rallied more than 1.5% after reporting collection of 100% of Q2 rents and slightly raising its full-year FFO outlook. American Finance (AFIN) and Four Corners (FCPT) report results after the close today while Store Capital (STOR) reports tomorrow morning.

Last week, we published Beat & Raise: Earnings Halftime Report. The REIT earnings frenzy intensifies further in the week ahead with more than 100 REITs reporting Q2 results including the full-slate of mall and hotel REIT reports and results from most of the remaining small-cap REITs. As discussed in our Real Estate Earnings Preview, notable reports we'll be watching this afternoon are cannabis REIT Innovative Industrial (IIPR), shopping center REITs Federal Realty (FRT), manufactured housing REIT UMH Properties (UMH), and timber REIT Rayonier (RYN).

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.8% today and are now off by 2.2% this week. Commercial mREITs slipped 0.5% and remain lower by 0.7% this week. Chimera (CIM) was among the outperformers today after reporting a modest increase in its BVPS in Q2. Western Asset (WMC) slid more than 10% after reporting an economic return on GAAP book value per share (BVPS) of negative 15.5% in Q2. Tremont Mortgage (TRMT) was also a laggard today after reporting that its BVPS was lower by 1% in Q2. We'll hear results this afternoon from Two Harbors (TWO) and Invesco Mortgage (IVR).

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.03% today, on average, and outperformed their respective common stock issues by an average of 1.32%. So far in 2021, REIT Preferred stocks are higher by 9.33% on a price return basis. The average REIT preferred pays a current yield of 5.98% and trades at a slight premium to par value.


Economic Data This Week

The busy week of economic data continues on Thursday with Jobless Claims and concludes on Friday with the BLS Nonfarm Payrolls report. Economists are looking for job growth of 900k in June, an acceleration from the 880k rate of job growth in June while the unemployment rate is expected to tick down to 5.7%. 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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