• Alex Pettee, CFA

WFH Woes • REIT Earnings • Retail Rebound

Summary

  • U.S. equity markets rallied Thursday - sending the major averages to fresh records- as investors dipped their toes back into reopening-sensitive sectors ahead of Friday's BLS nonfarm payrolls report.

  • Bouncing back from declines of 0.4% yesterday, the S&P 500 gained 0.6% today while the Mid-Cap 400 rallied 1.0% and the Small-Cap 600 jumped 1.4%.

  • Real estate equities were broadly higher today - led by retail and hotel REITs - amid a frenetic stretch of earnings reports as the Equity REIT Index gained 1.2% today.

  • Retail REITs rallied today following strong results from shopping center REIT Federal Realty as rent collection has fully normalized while troubled mall operator Pennsylvania REIT reported signs of recovery.

  • WFH Woes. Office REITs recovered today but remain the worst-performing REIT sector this week as several major corporations have announced delays in their plans to return to the office.

Real Estate Daily Recap

U.S. equity markets rallied Thursday - sending the major averages to fresh records- as investors dipped their toes back into reopening-sensitive sectors ahead of Friday's BLS nonfarm payrolls report. Bouncing back from declines of 0.4% yesterday, the S&P 500 gained 0.6% today while the Mid-Cap 400 rallied 1.0% and the Small-Cap 600 jumped 1.4%. Real estate equities were broadly higher today - led by retail and hotel REITs - amid a frenetic stretch of earnings reports as the Equity REIT Index gained 1.2% today with 18-of-19 property sectors in positive territory while Mortgage REITs gained 1.3%.

Investors were back in "risk-on" mode ahead of the critical BLS jobs report tomorrow morning as better-than-expected jobless claims data this morning eased some concern about a slowing labor market recovery following disappointing ADP employment data on Wednesday. Nine of the eleven GICS equity sectors finished higher today, led to the upside by the Financials (XLF) and Energy (XLE) sectors while homebuilders and the broader Hoya Capital Housing Index were also among the leaders following a slate of strong earnings results over the last 24 hours and as investors begin to price-in the effects of a continuation of Work-from-Home trends.

Real Estate Earnings Updates

Mall: Pennsylvania REIT (PEI) rallied roughly 5% after reporting a rebound in operating fundamentals and continued progress in its portfolio repositioning since emerging from bankruptcy earlier this year. PEI reported that its same-store NOI surged 53.9% in Q2, driven by a recovery in rent collection rates to nearly 90% in Q2 while it has had some success in collecting deferred rents from last year. Consistent with reports earlier in the week from Simon (SPG), Macerich (MAC), and Tanger (SKT), occupancy rates appear to have stabilized and halted a multi-year downtrend, but these REITs cannot afford another "double-dip" back into COVID-related restrictions.

Timber: Rayonier (RYN) rallied 4% after reporting a strong quarter and raising its full-year guidance. RYN now expects its Adjusted EBITDA - the most closely-watched metric for timber REITs - to rise 15.8% in 2021, up 380 bps from its prior outlook. RYN commented that its results “reflect continued momentum across our businesses and a markedly improved operating environment compared to the prior year. The pure-play timber REITs have outpaced their vertically-oriented peers Weyerhauser (WY) and PotlatchDeltic (PCH) this year as soaring lumber prices and supply chain bottlenecks have tempered the previously red-hot demand for wood products. CatchMark (CTT) reports results after the close today.

Net Lease: We heard results from a half-dozen net lease REITs over the past 24 hours. Store Capital (STOR) 3% rallied after reporting improving rent collection and boosting its full-year FFO growth outlook to 6.8%, up 130 bps from its prior outlook. American Finance (AFIN), Four Corners (FCPT), and Global Net Lease (GNL) rallied today after reporting collection of 100% of Q2 rents. Vereit (VER) - which will be acquired by Realty Income (O) - was flat today after reporting 99% rent collection .

Cannabis: Innovative Industrial (IIPR) gained 1.5% today after reporting another strong quarter, noting that its AFFO/share rose nearly 40% year-over-year. IIPR - which has been the best-performing REIT over the past three years - continues to plow ahead with one-off acquisitions and deals with cannabis cultivators. AFC Gamma (AFCG) - the newest REIT - traded flat today after reporting Q2 results this morning. While still early in the evolution of the industry, we see emerging parallels with the casino industry where REITs have carved out a profitable and attractive niche with a sustainable competitive advantage.

Shopping Center: Federal Realty (FRT) surged more than 6% today after reporting a very strong quarter with its same-store NOI jumping nearly 40% and raising its full-year FFO growth outlook by 980 bps to 15.3%. RPT Realty (RPT) also jumped today after reporting similarly strong results, noting that its same-store NOI rose by 13.5% in Q2 and raised its FFO guidance by 640 bps to 15.4%. Regency Centers (REG) reports results this afternoon.

Billboard: Lamar Advertising (LAMR) gained 2% after reporting improving results and boosted its full-year AFFO growth outlook to 21.4%, up from its prior outlook of 7.7%. Lamar noted that billboard revenue for the period surpassed revenue for the comparable quarter in 2019, while bookings in the transit and airport business continued to improve. LAMR also commented that it is recommending to its Board of Directors an increase in the quarterly dividend distribution to $1.00 per share for the third quarter. We'll hear results from Outfront (OUT) this afternoon.

Last week, we published Beat & Raise: Earnings Halftime Report. In addition to the aforementioned earnings reports, notable reports we'll be watching this afternoon are SFR REIT American Homes (AMH), (CTT), industrial REIT Americold (COLD), and a handful of hotel REITs including Apple Hospitality (APLE), Diamondrock (DRH), Services Properties (SVC), and Park Hotels (PK). Casino REIT MGM Growth (MGP), industrial REIT Plymouth (PLYM), and healthcare REIT Ventas (VTR) report tomorrow morning before the open as REIT earnings season wraps-up.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.4% today but remain lower by 0.8% this week. Commercial mREITs gained 1.5% and are now higher by 0.8% this week. Invesco Mortgage (IVR) slid more than 5% after reporting that its Book Value Per Share ("BVPS") slid 12% in Q2. Two Harbors (TWO) was slightly higher today despite reporting a roughly 10% decline in its BVPS in Q2 amid pressure from spread tightening. Ready Capital (RC) gained 2% after reporting that its BVPS was essentially flat in Q2. We'll hear results this afternoon from Hannon Armstrong (HASI), PennyMac (PMT), Ellington Financial (EFC), and Great Ajax (AJX).

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.01% today, on average, and underperformed their respective common stock issues by an average of 1.74%. So far in 2021, REIT Preferred stocks are higher by 9.35% on a price return basis. The average REIT preferred pays a current yield of 5.97% and trades at a slight premium to par value.

Economic Data This Week

The busy week of economic data concludes 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'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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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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