Over 200 US REITs and homebuilders have reported first-quarter earnings results over the past four weeks, providing critical information on the state of the commercial and residential real estate industry. A microcosm of the past two years across REIT world, interest rate movements dictated the narrative and stock performance, overshadowing what was ultimately a relatively solid earnings season for the sector. Consistent with the “Rates Up, REITs Down” paradigm, REITs sold-off sharply in late April as the 10-year Yield jumped to six-month highs, but rebounded strongly in early May after the weak nonfarm payrolls report and subsequent dovish Fed commentary revived some hopes of multiple rate cuts later this year. Of the 99 REITs that provide guidance, 41 (41%) raised their full-year FFO outlook, 48 (48%) maintained, while 10 REITs (10%) lowered their guidance – a “raise rate” that is slightly above the historical first-quarter average of around 40%. Within this group, 80% of the guidance revisions were to the upside, while 20% were negative. By comparison, FactSet reports that, among the S&P 500 companies that updated their guidance, 52% raised their outlook, while 48% lowered their forecast.
Notable winners included Apartment REITs – which reported a surprising firming in rents and occupancy despite ample multifamily supply; Healthcare REITs – which reported improving operator health with one notable exception (Steward); and Cannabis REITs – which have benefited from some long-awaited tailwinds on the Federal Legalization front. Results from Retail REITs were solid, as retailer demand continued to outstrip available supply, but to a more moderate degree than in early 2023. Results from Office REITs were passable – showing a modest acceleration in leasing activity and stabilizing occupancy – but the sector needs more than incremental steps to change the universally negative consensus narrative. On the debt-side, results from Mortgage REITs were hit-and-miss, with meaningful distress still limited to office. Notable losers this earnings season included Industrial and Self-Storage REITs – which indicated softness across much of the “goods economy” and Hotel REITs – which reported a moderation in leisure travel following a banner year in 2023. Among tech REITs, Data Centre demand and pricing power remained quite healthy in early 2024, but Cell Tower fundamentals have softened amid a lull in carrier network investment.
At the individual stock level, the “REIT Squeeze” is a theme that emerged in the final weeks of earnings season, corresponding to a revival of the “meme stock” phenomenon in some speculative corners of the market. Medical Properties (MPW) and Arbor Realty (ABR) – each of which have around 40% of their outstanding shares held short – have surged over the past two weeks, as have a handful of some heavily-shorted office REITs including SL Green (SLG) and Douglas Emmett (DEI). As typical when the paradigm pivots to Rates Down, REITs Up, small-cap and mid-cap REITs dominated the performance leaderboard this earnings season, led by the aforementioned “high Beta” names, many of which have elevated debt levels and are thus highly sensitive to rate movements. Other higher-quality names in the leaderboard earned their spot with notably strong operational performance, including apartment REIT Centerspace (CSR) medical office REIT Healthcare Realty (HR), and homebuilder Meritage Homes (MTH).
From the other side of the coin, the laggards list is populated largely by hotel and industrial REITs – each impacted by the secular themes noted previously. The most prominent laggard – Uniti Group (UNIT) – has slumped as the result of its planned merger with its former parent firm and largest tenant, Windstream. Rumours of a potential merger last month had sparked a rally in Uniti shares on speculation that the REIT may be the acquisition target – rather than the acquirer and surviving entity of the combination. Another notable laggard was commercial mortgage REIT Granite Point (GPMT), which reported a plunge in its Book Value resulting from a further deterioration in office loan performance, which represents 45% of its portfolio – the most concentrated office debt exposure in the mREIT space. Residential mREIT New York Mortgage (NYMT) was also a double-digit decliner, with weak results driven by impairments in several of its joint venture investments.
Takeaway: A changing of the guard?
A microcosm of the past two years in REIT world, interest rate movements dictated the narrative and stock performance, overshadowing what was ultimately a relatively solid earnings season for the sector. Obscured a bit by the interest rate dynamics, we observed a notable shift in leadership from pro-cyclical, service-oriented sectors towards the more counter-cyclical and rate-sensitive sectors. As noted in this report, winners included Apartment REITs – which reported a surprising firming in rents and occupancy despite ample multifamily supply; Healthcare REITs – which reported improving operator health with one notable exception (Steward); and Cannabis REITs – which have benefited from some long-awaited tailwinds on the Federal Legalization front. As we’ll discuss in the Losers of REIT Earnings Season report later this week, notable losers this earnings season included Industrial REITs – which indicated softness across much of the “goods economy” and Hotel REITs – which reported a moderation in leisure travel.
