Calling The Top For Real Estate?

Real Estate Earnings Preview

Real estate earnings season kicks off this week and will continue for the next five weeks. More than 100 REITs and 10 homebuilders will report third quarter earnings which will be closely watched by economists and investors seeking to confirm or refute the emerging proposition that housing markets may be seeing significant softness heading into the end of the year.

real estate earnings preview

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Real Estate Earnings Calendar

Below we compiled the earnings calendar for the largest 100 REITs and fifteen largest homebuilders, which we will update throughout earnings season in our Real Estate Weekly Review.

img src="https://static.seekingalpha.com/uploads/2018/10/1723581_15396333614602_rId7_thumb.jpg" data-width="640" data-height="361" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

(Source: Company Filings, NASDAQ)

Rates Up, REITs (And Homebuilders) Down

Amid a 30 basis-point jump in the 10-year yield, the REIT ETFs (VNQ and IYR) have dipped roughly 5% while Homebuilders (XHB and ITB) have retreated more than 20% since the start of last earnings season. The Housing 100, a broad measure of the US housing market, has dipped 8% as solid performance in the residential REIT and home improvement sectors were offset by significant weakness in the building, brokerage, and real estate information/technology sectors.

img src="https://static.seekingalpha.com/uploads/2018/10/1723581_15396333614602_rId10_thumb.jpg" alt="REIT housing performance" data-width="640" data-height="366" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">REIT housing performance>For real estate equities, rising rates have been a continuing headwind for much of the past two years after the 10-Year Yield bottomed below 1.40% in August of 2016. Heading into last earnings season, REITs were in the midst of a strong rally on signs of stabilization in the rate markets. The recent surge in the 10-Year Yield above the 3.0% level has sent REITs sharply lower in recent weeks heading into third quarter earnings season.

img src="https://static.seekingalpha.com/uploads/2018/10/1723581_15396333614602_rId15_thumb.jpg" alt="rates up REITs down" data-width="640" data-height="336" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">rates up REITs down>

Already facing pressure from unaffordability issues, rising mortgage rates in 2018 has led to a softening in single-family housing market data, particularly existing home sales and home price appreciation. After surging more than 50% in 2017, homebuilders have plunged 30% since January despite otherwise solid fundamental performance through the first two quarters of the year.

img src="https://static.seekingalpha.com/uploads/2018/10/1723581_15396333614602_rId16_thumb.jpg" alt="homebuilders mortgage rates" data-width="640" data-height="335" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">homebuilders mortgage rates>

While the REIT/Rate correlation is nothing new, the sudden positive correlation between homebuilders and 10-Year Treasuries is something to monitor. The 30-Year mortgage rate, which tends to track the movement in the 10-Year yield, bottomed in the summer of 2016 at 3.4% and has climbed steadily over the last two years, now approaching 5.0%. Each one percentage point move in the 30-Year mortgage rate translates to a roughly $150 per month increase in mortgage payments on a $250,000 loan.

img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-15396379641478713.png" alt="homebuilder rates up reits down" width="640" height="210" data-width="640" data-height="210" data-og-image-twitter_small_card="false" data-og-image-twitter_large_card="false" data-og-image-twitter_image_post="false" data-og-image-msn="false" data-og-image-facebook="false" data-og-image-google_news="false" data-og-image-google_plus="false" data-og-image-linkdin="false"">homebuilder rates up reits down>

Top Storylines To Watch During Earnings Season

1) All Eyes On The Housing Markets

The US housing market has again taken center-stage amid a period of heightened financial market volatility, rising interest rates, and a moderation in housing data over the summer months. As expected, rising mortgage rates appear to finally be slowing the rate of home price appreciation from the above-trend rate of 7-8% back towards the 3-5% level, on par with nominal GDP growth.img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-15396449685806077.png" data-width="640" data-height="396" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

For Homebuilders, investors will be focused on signs of margin pressure related to slowing house prices, net new order growth, and guidance for the rest of 2018. Deliveries rose 12% last quarter while net new orders rose a solid 7%, but the largest five builders were responsible for nearly all of the gains, continuing the "go big or go home" theme we've been discussing for several quarters.

img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-15396518708184726.png" alt="homebuilders earnings" width="640" height="288" data-width="640" data-height="288" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">homebuilders earnings>While the single-family housing market is showing signs of softness, there are signs that residential REITs are picking up the slack. Apartment and Manufactured Housing REITs were the top performers of the last quarter after RealPage reported that rents and occupancy both inflected higher in the second quarter despite continued supply pressure. We continue to believe that, given the underlying and persistent shortage of housing in the US, that any weakness in the single-family markets will be offset by strength in the rental markets and that overall housing costs will continue to outpace the broader inflation rate.img src="https://static.seekingalpha.com/uploads/2018/10/1723581_15393655130419_rId12_thumb.jpg" alt="housing shortgage" data-width="640" data-height="406" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">housing shortgage>

2) Did The Retail Resurgence Get Derailed?

While the financial media was relentlessly pushing the gloom-and-doom “retail apocalypse” false narrative, we’ve been discussing for many months that, in reality, fundamentals were inflecting higher across much of the brick-and-mortar retail sector. Even despite September's miss on retail sales, which was perhaps hurricane-related, 2018 is on track to be the best year for growth in retail sales since 2012. Nonstore retail sales continue to grow at a double-digit rate, supporting insatiable demand for logistics-focused industrial REIT assets.

img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-1539646400744898.png" alt="retail resurgence" width="640" height="413" data-width="640" data-height="413" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">retail resurgence>

Until the recent bankruptcy announcements of Sears and Mattress Firm, 2018 was shaping up to be a year of retail rejuvenation with the worst of the store closings now in the rear-view mirror. With shopping center REITs finally working off the big-box openings from the Sports Authority and Toys R Us bankruptcies, it's clear that they aren't out of the woods quite yet. For for the high-quality mall REITs, however, the Sears bankruptcy may be a net positive as many of these vacant stores will be repurposed into more productive and higher-rent usage. We are looking closely at commentary regarding these recent bankruptcies.

3) Is Job Growth Enough to Power 'Growth REITs'?

The pace of job growth has picked up steam in the wake of tax reform, providing a solid boost the most economically-sensitive REIT sectors including office and hotel REITs. Late-cycle is supposed to be the time to shine for Office REITs, but supply growth in major markets has spoiled the party for many office REITs. Strong leasing demand from co-working firms like WeWork has saved 2018 from being a complete let-down. We're interested to hear commentary regarding co-working from office REITs.

img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-15396438089736.png" data-width="640" data-height="417" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">>

Hotel REITs are in a similar position, enjoying a favorable economic backdrop but not seeing the type of outperformance that one would expect given the conditions. While average occupancy is on pace to break another record in 2018 and ADR and RevPar have exceeded expectations this year, hotel REITs' performance has been underwhelming.

4) Can The Reaccelerating Continue Despite NAV Discount

Following several years of robust construction growth, new development activity has tailed off in recent quarters, coinciding with a surprising reacceleration in economic growth, led by the resurgent labor markets. On an inflation-adjusted-basis, construction spending turned negative on a TTM basis in early 2018 for the first time since late 2011. Peaking supply growth, combined with accelerating demand growth has allowed REITs to regain their footing in 2018 after stumbling last year. We'll be watching the same-store NOI growth metric to see if the recent inflection higher can be continued.

img src="https://static.seekingalpha.com/uploads/2018/8/22/1723581-15349936501134264.png" alt="reit ffo per share dividends" width="540" height="390" data-width="640" data-height="462" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">reit ffo per share dividends>

As shown above, the FFO/share and dividends/share metrics, which normally track same-store NOI growth, have dramatically underperformed the trend since 2017, attributable to the persistent NAV discount which has made external growth more challenging for most REIT sectors. After the recent sell-off, REIT valuations are back near the low-end of the post-recession range.

img src="https://static.seekingalpha.com/uploads/2018/10/15/1723581-15396422287166147.png" alt="REIT valuations october 2018" width="640" height="446" data-width="640" data-height="446" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">REIT valuations october 2018>Equity valuations play an important role in the underlying operating fundamentals of the REIT business, particularly for REITs that have historically relied on their NAV premium to fuel external growth through acquisitions. The Yield REIT sectors including Net Lease, Healthcare, and Storage are most impacted by impaired equity valuations.

While the NAV discount has shrunk in recent months, the persistent NAV discount has forced many REITs to scale back their acquisition plans and many REITs have sold assets in an attempt to close the valuation mismatch. While selling assets into a NAV discount does create long-term shareholder value, it typically results in short-term negative impacts to traditional closely watched metrics like FFO and dividend per share.

img src="https://static.seekingalpha.com/uploads/2018/8/22/1723581-1534993653829485.png" alt="REIT net acquisitions" width="540" height="386" data-width="640" data-height="457" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">REIT net acquisitions>

Development-oriented REITs, however, are better positioned to benefit from the NAV discount. Fueled by firm private market values, development yields remain attractive in many sectors, though these yields have shown signs of compression in recent quarters as costs rise and cap rates have softened slightly. The development pipeline remains near a record-high at $42 billion, exceeding the 2008 peak of $38 billion. The industrial and residential sectors pipelines remain full while the retail sector continues to see only modest redevelopment and almost zero new development.

img src="https://static.seekingalpha.com/uploads/2018/8/22/1723581-15349936548502297.png" alt="reit development pipeline" width="540" height="388" data-width="640" data-height="460" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">reit development pipeline>

Bottom Line

Earnings season kicks off this week in the real estate sector. More than 100 REITs and 10 homebuilders will report third quarter earnings over the next five weeks. Real estate equities continue to be negatively impacted by rising interest rates. REIT ETFs have dipped 5% over the last quarter while homebuilders have dipped 20%.

Already facing pressure related to unaffordability issues, rising mortgage rates in 2018 has led to a softening in the single-family housing markets. Rental markets have largely picked up the slack. Most REIT sectors are experiencing a mild reacceleration in fundamentals as oversupply pressures continue to fade. Analysts expect another solid quarter for REITs, powered by better-than-expected job growth in 2018. Retail REIT’s commentary will be in-focus after another round of high profile retail bankruptcies. Residential REIT rent growth metrics will be an important barometer of the broader housing market.

With earnings season beginning this week, be sure to check out all of our quarterly updates: Single-Family Rentals, Data Center, Apartments, Cell Towers, Manufactured Housing, Net Lease, Malls, Industrial, Shopping Center, Hotel, Office, Healthcare, Industrial, Storage, Homebuilders, and Student Housing.

Please add your comments if you have additional insight or opinions. We encourage readers to follow our Seeking Alpha page (click "Follow" at the top) to continue to stay up to date on our REIT rankings, weekly recaps, and analysis on the real estate and income sectors.

Disclosure: I am/we are long VNQ, SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All of our research is for informational purposes only, always provided free of charge exclusively on Seeking Alpha. Recommendations and commentary are purely theoretical and not intended as investment advice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. For investment advice, consult your financial advisor.

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