CSR - Winners Of REIT Earnings Season

2023-05-09 10:30:00 ET

Summary

• You wouldn't know it by reading the mainstream financial press, but there's more to commercial real estate than office buildings. Obscured by office pain, REITs delivered surprisingly strong first quarter results.
• Of the 83 equity REITs that provide full-year Funds from Operations ("FFO") guidance, 37 (44%) raised their full-year earnings outlook, while 5 (6%) lowered guidance.
• The Equity REIT Index has outperformed the S&P 500 since the start of earnings season, lifted by this solid slate of reports and tailwinds from a moderation in interest rates.
• Surprisingly buoyant rent growth - particularly across the residential, industrial, hospitality, technology, and retail sectors - was the prevailing theme of these upward revisions. Tenant rent collection improved for healthcare and cannabis REITs.
• Expense pressures abated a bit for some sub-sectors - notably in the labor-heavy cold storage and full-service hospitality - but were otherwise "status quo" for most other sectors. We've seen 5 REITs announce dividend cuts while 5 REITs raised their dividends.

Real Estate Earnings Recap: Part 1

This is an abridged version of the full report and rankings published on Hoya Capital Income Builder Marketplace on May 7th. In Part 1 of our Earnings Recap, we cover the nine best-performing property sectors, and in Part 2 later this week, we cover the nine remaining property sectors.

Nearly 200 U.S. REITs have reported first-quarter earnings results over the past month, providing critical information on the state of the commercial and residential real estate industry. You wouldn't know it by reading the mainstream financial press, but there's more to commercial real estate than office buildings. Obscured by office pain, REITs delivered surprisingly strong first quarter results. Consistent with the trends seen across the broader equity market with the highest "beat rate" for S&P 500 companies since 2021, REIT earnings season was similarly solid - and certainly better than the prevailing negative narrative surrounding commercial real estate would suggest. Of the 83 equity REITs that provide full-year Funds from Operations ("FFO") guidance, 37 (44%) raised their full-year earnings outlook, while 5 (6%) lowered guidance - a FFO beat rate that exceeded the historical REIT average of 40% for the first quarter. The "beat rate" for the critical property-level metric - same-store Net Operating Income ("NOI") - was actually slightly better, with over 50% of REITs providing upward revisions.

Surprisingly buoyant rent growth - particularly across the residential, industrial, hospitality, technology, and retail sectors - was the prevailing theme of these upward revisions. Tenant rent collection improved for healthcare and cannabis REITs as well. Expense pressures abated a bit for some sub-sectors - notably in the labor-heavy cold storage and full-service hospitality - but were otherwise "status quo" for most other sectors. The Equity REIT Index ( VNQ ) has outperformed the S&P 500 since the start of earnings season in mid-April, lifted by this solid slate of reports and added tailwinds from a moderation in interest rates. Performance trends have generally followed the fundamentals, with Single-Family Rental, Data Center, and Industrial REITs leading to the upside since the start of earnings season, while office, farmland, and billboard REITs have been among the laggards this earnings season.

Dividend sustainability has been in focus, and we've been scouring through earnings calls to glean insights into the outlook for dividend hikes - and in some cases, dividend cuts - this year. We've seen 5 REITs announce dividend cuts this earnings season - four office REITs and one mortgage REIT - which brings the full-year total to 15, matching the full-year total from 2022. On the upside, 5 REITs have raised their dividends since the start of earnings season, bringing the full-year total to 48, which is tracking slightly behind last year's record pace. Earnings call commentary suggests that we'll see a handful of additional reductions in the months ahead as over-levered REITs look to redeploy this capital to pay down variable rate debt, but expect these reductions to remain largely within the office and mortgage REIT sectors.

Winners of REIT Earnings Season

Single-Family Rental : (Performance Rank: #1) Buoyant rent growth was the prevailing theme for residential REITs this earnings season, particularly these SFR REITs, which aren't facing the same looming supply headwinds as multifamily REITs. American Homes ( AMH ) has gained over 8% since the start of earnings season after reporting impressive rent growth trends in Q1, achieving blended rent spreads of 7.1% in Q1, and commented that its "seeing some real encouraging leasing results from the early spring leasing season with March and April new leases, in particular, accelerating above 9%." AMH reported preliminary blended April spreads of 7.1%. Invitation Homes ( INVH ) has gained nearly 7% this earnings season after it reported similarly solid results and also maintained its full-year outlook, which calls for FFO growth of 4.3% and NOI growth of 4.8% - roughly in-line with AMH's outlook for FFO growth of 4.5% and NOI growth of 4.0%. Rent collection was better than expected at 99% of the company's historical average - steady with Q4 - as concerns of significant rent loss in its California markets haven't materialized. INVH reported blended rent growth of 7.3% in Q1 and noted that its preliminary spreads in April were also 7.3%.

Data Center : (Performance Rank: #2) Impressive pricing power was also on display in the data center space. Equinix ( EQIX ) has gained about 7% since the start of earnings season after it raised its full-year revenue and FFO outlook while also recording its strongest quarter of same-store revenue growth on record at 11%. EQIX now projects full-year revenue growth of 13.2% - up 20 basis points from its prior outlook - and sees FFO growth at 6.9% - up 130 basis points. While some of this revenue growth was attributed to power price increases ("PPI"), EQIX notes that even without these pass-through expenses, the increase was still impressive at 7%, commenting that "Pricing is definitely firm...we've raised pricing both on the retail side, space, power and on the interconnection units." Digital Realty ( DLR ) has gained about 8% this earnings season after reporting similarly strong pricing trends with renewal rent spreads rising 4.5% - the strongest quarter since 2019 - to which DLR commented, "we feel confident that this positive pricing environment is sustainable and here to stay." New leasing volume was light, however, with DLR signing $83M of incremental annualized GAAP rental revenues - the lowest since Q1 of 2020. DLR reiterated its guidance calling for "same-capital" NOI growth of 3.4% for full-year 2023, which would be the first year of positive organic growth since 2017.

Industrial : (Performance Rank #3) "Beat and raise" was the prevailing theme across the results from the six largest industrial REITs, all of which increased their full-year NOI and FFO guidance. After a rent growth moderating in late 2022 - which many expected to continue throughout this year - rent spreads have actually reaccelerated in early 2023, perhaps credited to a moderation in cost pressures for tenants in other areas of the supply chain, specifically freight costs, which are as now much as 90% lower than their peak in September 2021. Rent growth on new and renewed leases rose 40% from last year - climbing to a fresh record-high for the sector - while occupancy rates also increased from last quarter to new highs, showing that demand continues to substantially outpace available supply. STAG Industrial ( STAG ) has been the upside standout this earnings season after boosting its FFO and NOI outlook and subsequently being added to the S&P Mid-Cap 400 - an important milestone for the relatively young REIT. Plymouth ( PLYM ) has also been a top performer this earnings season after reporting solid results and maintaining its full-year FFO and NOI outlook, while EastGroup ( EGP ) provided the most impressive upward guidance revisions of the group.

Apartment : (Performance Rank: #4) Apartment REIT earnings results were solid across the board, showing similar "stickiness" to rental rate trends and underscoring the embedded rent growth that is still being unlocked from existing renters even as new lease rent growth cools from historic highs. Four apartment REITs hiked FFO estimates - two Sunbelt-focused REITs and two coastal-focused REITs - while REITs across both regions reported nearly identical 4% blended rent growth in Q1 with a slight acceleration in April, consistent with recent data from Apartment List and Zillow showing that rental rate trends have firmed in recent months following a sharp deceleration in late 2022. While commentary indicated expectations of supply headwinds later this year, most REITs have seen a material slowdown in new ground-breakings given tighter credit conditions, providing reasons for optimism heading into the back half of 2023 and into 2024. Centerspace ( CSR ) and Independence Realty ( IRT ) have been the top performers since the start of earnings season. AvalonBay ( AVB ) raised its full-year FFO growth outlook and commented that its recent leasing activity is "materially exceeding initial rent and yield expectations." NexPoint Residential ( NXRT ) was one of two apartment REITs to lower its FFO outlook - a revision driven by higher interest expense - but the small-cap REIT also reported perhaps the strongest property-level metrics, reiterating its call for 11% NOI growth this year.

Hotel : (Performance Rank: #5) An impressive slate of hotel REIT reports was highlighted by Host Hotels ( HST ) - the largest hotel REIT - which has rallied more than 7% since the start of earnings season after it significantly raised its full-year outlook. HST boosted its full-year guidance for Revenue Per Available Room ("RevPAR") to 9.0% at the midpoint - up from its prior outlook for 2.5% growth - and now sees FFO growth of 5.9% this year, a 1,010 basis point increase compared to its prior outlook calling for a 4.2% FFO decline, citing "continued rate strength and increases in occupancy, with meaningful improvement in the group business segment.” Park Hotels ( PK ) has gained over 8% in this time after it also significantly raised its full-year FFO outlook, now projecting FFO growth of 26.0%, up from 16.6% last quarter, citing "ongoing improvements at our urban hotels and sustained strength in our resort markets, while an acceleration in group trends drove healthy margin gains during the quarter." Apple Hospitality ( APLE ) - a more defensive name in the sector - affirmed its outlook of 5% RevPAR growth and reported that its Q1 RevPAR was 6% above its comparable pre-pandemic level from Q1 2019 with the strongest comparable occupancy rates in the sector.

Healthcare : (Performance Rank #6) Embattled hospital owner Medical Properties ( MPW ) - which has been in the cross-hairs of short-sellers for the past year - has been an upside standout this earnings season after reporting better-than-feared results and maintaining its dividend. Under pressure from tenant rent collection issues, MPW lowered the midpoint of its FFO guidance, citing recent asset sales and debt reduction costs, but "no news" was seen as "good news" regarding tenant issues. Skilled nursing REIT Omega Healthcare ( OHI ) rallied after reporting positive progress in operator lease restructurings. OHI noted that "the operating backdrop continues to improve, with occupancy increasing, the tight labor market moderating slightly, and federal and state reimbursement increases providing much-needed support." On the private-pay side, senior housing REIT Welltower ( WELL ) provided the lone upward guidance revision driven by a continued recovery in its senior housing operating ("SHOP") portfolio. Lab space owner Alexandria Real Estate ( ARE ) reiterated its full-year outlook calling for FFO growth of 6.4% while noting that it collected 99.9% of rents in Q1 and 99.7% thus far in April - pushing back on concerns over its tenants' exposure to Silicon Valley Bank - while achieving record-high rental rate increases of 48.3% GAAP/ 24.2% cash.

Net Lease : (Performance Rank: #7) Net lease results showed that cap rates - and investment spreads - have trended meaningfully higher in recent months as private market pricing has finally started to adjust to the higher interest rate environment. Four of the nine net lease REITs that provide guidance raised their full-year outlook. Spirit Realty ( SRC ) has been an upside standout after raising its full-year FFO growth outlook to 0.3% - up from its prior outlook for flat growth. SRC acquired seven properties for $239M in Q1 at a capitalization rate of 7.9% - up from its cap rate in Q4 of 7.3%. EPR Properties ( EPR ) has also been an outperformer after reporting that it collected 100% of rents and deferred payments through April from Regal despite the bankruptcy filing from its parent firm Cinemark. Essential Properties ( EPRT ) raised its full-year FFO growth outlook to 5.9% - up 200 basis points from last quarter. EPRT acquired roughly $200M in assets in Q1 at a 7.6% cap rate - up from recent lows in late 2021 of 6.9% - and sold $37M of assets at a 6.1% cap rate. Realty Income ( O ) - the largest net lease REIT - raised its full-year FFO outlook and reported that it acquired $1.7 billion of properties in Q1 at a cap rate of 7.0% - up from 6.1% last quarter.

Manufactured Housing : (Performance Rank: #8) Results from Equity LifeStyle ( ELS ) and Sun Communities ( SUI ) were generally in line with expectations, with each maintaining their full-year FFO outlook. Both cited strong pricing trends in their core manufacturing housing segment and their marina divisions - and each raised their property-level guidance for these segments - which was offset by some lingering softness in their RV segment - an area that has been impacted by higher fuel prices and a post-COVID normalization. Expense concerns - primarily related to weather and insurance premiums - have also been a focus. Of note, ELS reported that its premiums on its property and casualty insurance increased by 58% year-over-year, with SUI incurring a similar double-digit increase in the prior quarter. While SUI's marina investments appear to be working out well, performance from SUI's Park Holiday's UK portfolio - which it acquired last year - has raised some concerns following a rather significant downward revision to its revenue guidance for this segment, which it attributes to lower home sales expectations.

Casino : (Performance Rank: #9) The top-performing sector from 2022, both casino REITs reported in-line results. VICI Properties ( VICI ) maintained its full-year outlook calling for FFO growth of 9.6%. As expected, M&A was the focus of the earnings call. VICI commented that it has "funding in place to seize on further an opportunity if an opportunity presents itself" but kept its cards close to its chest on who specifically if anyone, the firm is in discussions with. VICI noted that its team is "intensely studying sectors we believe fit well" with its investment criteria and specifically mentioned health and wellness, sports facilities, and theme parks. VICI also spent time discussing its expanding relationship with tribal nations, having recently added the Cherokee Nation of Oklahoma to its tenant roster. Gaming and Leisure Properties ( GLPI ) slightly raised its full-year FFO growth outlook to 2.8% - up from 2.5% last quarter - driven by a downward revision in interest rate expense expectations. On the M&A environment, GLPI commented, "large scale M&A has clearly slowed. The credit market impact, along with the adjustment needed for valuations, has caused a little bit of a slowdown on that front. But with respect to strategic one-off type property transactions, those are still plentiful and people are still looking to enhance their portfolios."

Takeaway: Office Pain Hides Strong Quarter

You wouldn't know it by reading the mainstream financial press, but there's more to commercial real estate than office buildings. Obscured by office pain, REITs delivered surprisingly strong first-quarter results. Of the 83 equity REITs that provide full-year Funds from Operations ("FFO") guidance, 37 (44%) raised their full-year earnings outlook, while 5 (6%) lowered guidance. Surprisingly buoyant rent growth - particularly across the residential, industrial, hospitality, technology, and retail sectors - was the prevailing theme of these upward revisions. Expense pressures abated a bit for some sub-sectors - notably in the labor-heavy cold storage and full-service hospitality - but were otherwise "status quo" for most other sectors. While REIT dividends remain historically well-covered, on average, a handful of REITs have been caught flat-footed by the significant rise in interest rates, while others have been slammed by sector-specific headwinds, themes that we'll discuss later this week in Part 2 of our Earnings Recap : Losers of REIT Earnings Season.

For an in-depth analysis of all real estate sectors, check out all of our quarterly reports: Apartments , Homebuilders , Manufactured Housing , Student Housing , Single-Family Rentals , Cell Towers , Casinos , Industrial , Data Center , Malls, Healthcare , Net Lease , Shopping Centers , Hotels , Billboards , Office , Farmland , Storage , Timber , Mortgage , and Cannabis.

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.

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