Early Earnings News for REITs Mostly Positive

This article is republished with permission from REITCafe.

Midyear earnings season is getting underway, and news from large real estate investment trusts (REITs) has been mostly positive, but mixed. REITs have benefited from strong underlying real estate market fundamentals and ongoing low interest rates, although new supply is becoming a concern for some product types in selected markets.

Prologis kicked off earnings season with its July 19 release. The industrial REIT’s vacancy rate fell to low levels, and earnings nearly doubled during the second quarter, as it handily beat Wall Street expectations. Expansion of e-commerce and goals for faster delivery to customers fueled demand for warehouses and distribution centers. The company noted that, despite a significant U.K. and E.U. portfolio, it does not expect Brexit to significantly affect its operations, because its U.K. customers mostly serve the domestic market.

Several office REITs reported strong leasing activity in Manhattan, especially with renewals. Office REIT Boston Properties reported second-quarter funds from operations (FFO) of $1.43 per share that beat analyst expectations. Lease termination income contributed to higher earnings, but portfolio occupancy dropped slightly during the quarter. The company is moving forward with eight new projects and one redevelopment totaling 3.8 million square feet (353,000 sq m), including a move beyond its traditional four core markets into southern California with a 50 percent purchase of Colorado Center in west Los Angeles. SL Green also reported strong leasing volume, increased its Manhattan same-store occupancy, and more than doubled its FFO. Demolition work to prepare the site for its $3.1 One Vanderbilt project is underway.

Second-quarter retail REIT performance was stronger than might have been expected, especially given concerns about e-commerce encroaching on bricks-and-mortar retail. The FFO of Simon Property Group were slightly ahead of expectations. The company’s mall occupancy fell slightly from year-ago levels, but base minimum rents were up. Still, profit and revenue declined as the strong U.S. dollar affected tourist spending. Brixmor, DDR, and Tanger Factory Outlets also beat Wall Street FFO expectations, while Kimco Realty met expectations. In the net-lease sector, FFO for Realty Income Trust missed slightly. The company has maintained strong acquisitions activity thanks to a significant pipeline of investment opportunities and low interest rates.

Earnings for several major apartment REITs have been affected by slower growth in the San Francisco and New York luxury markets. Whether supply issues in these areas are short-term and related to timing of deliveries and lease-up, or whether the impacts on the markets will be more long-term remains to be seen. Equity Residential (EQR) second-quarter earnings beat Wall Street expectations, but the company noted during its earnings call that performance has been affected by a slowdown in the San Francisco and, to a lesser extent, New York luxury markets, driven by significant deliveries and slower growth in high-paying jobs. The company has reduced guidance on revenue growth twice this year. Core FFO for Avalon Bay grew 8.5 percent on the strength of same-store revenue growth and contributions from new lease-ups. Still, the company’s earnings per share (EPS) missed estimates. It also noted that rent growth has moderated in the Northeast and in northern California.

Large REITs in other sectors have also reported earnings. Public Storage posted second-quarter EPS that were in line with expectations. Revenue growth was down in Denver and Houston, perhaps because of slower economic growth and energy-related out-migration. The company also noted that an influx of new supply is creating challenges in some of its markets, like New York.

American Campus Communities reported second-quarter FFO that were ahead of analyst estimates. The company noted 2016–2017 leasing that was 98.7 percent applied for and 93.1 percent leased, with seven developments on track for delivery this year.

Real estate fundamentals are healthy, and REITs have posted strong performance in 2016. The bar has been set high, and the question remains about whether REITs will be able to sustain or improve upon performance going forward.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

** - 10 yr. Treasury Yield as of 7/29/2016.