Real Estate Earnings Recap
Nearly 200 REITs have reported earnings results over the past five weeks, providing critical information on the state of the real estate industry amid the extreme volatility in early 2022. Results were generally better-than-expected with roughly 80% of equity REITs beating consensus FFO estimates while roughly 75% of REITs that provide full-year guidance eclipsed their most recent outlook. Critically, the initial outlook for 2022 was impressive across most property sectors, reflecting a high degree of confidence among REIT executives that the growth momentum will be sustained beyond the initial post-pandemic recovery and amid the rising rate environment.
Dividend hikes were the major theme of earnings season with more than two dozen REITs hiking their distributions over the past five weeks. We’ve now seen 40 equity REITs hike their dividend through the first two months of 2022, outpacing the record-year of dividend hikes in 2021 when 130 REITs raised their distribution rates. As discussed in our State of the REIT Nation, dividend payout ratios remain historically low at below 70%, indicating that REITs are well equipped to continue to raise their payouts in the quarters ahead.
Despite the strong slate of earnings reports across most property sectors, performance trends continue to be dominated by macroeconomic factors, notably the “rates up, REITs down” paradigm that has pulled valuations back towards “cheap” levels. Just two REIT sectors – office and hotels – are in positive territory on the year while property sectors with some of the more impressive earnings results – residential, industrial, and technology – have continued to lag. With real estate earnings season now essentially complete – sans a handful of stragglers that report results over the next few weeks – we compiled the critical metrics across each real estate property sector.
Residential REIT Earnings Recap
Apartment: (Final Grade: A) Rents are soaring at the fastest pace on record in essentially every major market across the country with few signs of slowing in early 2022. After rising nearly 20% in 2021, renters should prepare for double-digit rent increases again in 2022 as apartment REITs recorded average blended rent growth of nearly 14% in January. Riding the rental boom, Apartment REITs continue to report stellar earnings results, ending 2021 with record-high occupancy rates with the momentum accelerating in 2022 with 15% FFO growth expected this year. We remain bullish on apartment REITs and continue to lean towards Sunbelt-focused REITs.
Single Family Rental: (Final Grade: B+) SFR fundamentals remain similarly stellar as Invitation Homes (INVH) and American Homes (AMH) reported average FFO growth of nearly 18% in 2021 and see further growth of 12% in 2022 at the midpoint of their initial guidance range. Rent growth has exhibited few signs of slowing as INVH reported 17.3% growth on new leases in Q4 while AMH reported 12.2% growth, which should power another year of double-digit same-store NOI growth. Impressively, external growth has continued despite the highly-competitive home sales market as INVH and AMH each added nearly 5,000 homes to their portfolios in 2021, and we think that institutional investors including these SFR REITs will scoop up an even larger share of single-family homes as mortgage rates rise.
Storage: (Final Grade: A+) Closely linked to the performance of the surging multifamily markets, one of the lasting real estate storylines of the pandemic will be the incredible rebound in the self-storage sector. All five storage REITs delivered NOI and FFO growth above their prior guidance for full-year 2021 as self-storage demand has been insatiable over the last 18 months. Across the storage sector, FFO growth is expected to average more than 16% in 2022 following incredible growth of 27% in 2021. Extra Space (EXR) sees rent growth in the magnitude of 20% in early 2022 but does expect to see some moderation throughout the year following the historic surge in rents in 2021.
Manufactured Housing: (Final Grade: B+) For MH REITs, the remarkable consistency of delivering 4-5% rent growth over the past decade has actually been a headwind given the double-digit rent growth achieved by other residential sectors. Underscoring the importance of Sun Communities’ (SUI) and Equity LifeStyle’s (ELS) push into similar – but more pro-cyclical – asset classes, while the core manufactured housing business remains predictably solid, the RV and marina businesses are driving the incremental growth both at the organic same-store level and the external-growth level. SUI recorded same-store NOI growth of 11.2% in 2021 driven by a 4.9% increase in core manufactured housing NOI and an incredible 28.9% increase in RV NOI. Longer-term, the secular tailwinds resulting from the affordable housing shortage should persist into the back half of the 2020s, if not longer.
Student Housing: (Final Grade: A) American Campus (ACC) has been among the best performers after reporting strong results and providing guidance that projects a full recovery in FFO in 2022. ACC is targeting pre-pandemic occupancy levels for the coming academic year with revenue growth of nearly 4% at the midpoint of its guidance range. The student housing sector has delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the 2021-2022 academic year, and despite the broader enrollment declines at the national level due to a myriad of short-term and structural headwinds, student housing fundamentals in these top-tier university markets have improved above the pre-pandemic baseline.
Healthcare: (Final Grade: B+) Senior housing REITs were the upside standout of earnings season as Welltower (WELL) and Ventas (VTR) each reported continued improvement in their senior housing portfolios despite the Omicron surge in late 2021. Skilled nursing REITs Omega (OHI) and Sabra (SBRA) have also outperformed as SNF operator issues didn’t show meaningful deterioration beyond the known issues from late 2021, but small-cap CareTrust (CTRE) – which had impressively managed to avoid operator issues in recent years – has lagged after announcing plans to sell about 32 assets operated by troubled tenants, representing about 10% of its portfolio. Lab space and medical office REIT earnings results were mostly in-line with expectations with the major development coming last week with reports that Healthcare Trust of America (HTA) and Healthcare Realty Trust (HR) are reportedly in advanced merger discussions.
Technology & Logistics Earnings Recap
Industrial: (Final Grade: A-) Supply chain woes did little to slow down the red-hot industrial REIT sector, which reported that demand for logistics space remains insatiable as businesses scramble to strengthen their supply chain. Six of the seven REITs that provide full-year NOI and FFO guidance beat their prior outlook indicating that fundamentals remain stellar across the sector as insatiable demand clashes with limited supply. Upside standouts include First Industrial (FR), which recorded NOI growth of 12.3% in 2021 and expects further growth of 7.8% this year – both of which were the highest in the industrial sector. Americold (COLD) – which has a more “services-oriented” business model – delivered a notably weak report, recording an FFO decline of nearly 11% in 2021 and it sees another 9% decline in 2022.
Data Center: (Final Grade: B-) Data center REITs have settled into a consistent mid-single-digit annual FFO growth trend, which is outstanding in a low-growth environment, but less impressive in the current inflationary macro environment. Driven by record leasing volume from Digital Realty (NYSE:DLR), data center leasing metrics substantially exceeded their previous record high even without accounting for two of the three REITs that were acquired in 2021, but pricing power remains soft for larger hyperscale leases as data center REITs remain heavily reliant on external development to drive FFO growth. Interestingly, Iron Mountain (IRM) has been the standout after reporting impressive growth in its data center segment, booking 27 MW of new and expansion leases in the fourth quarter, bringing its full-year total to 49 MW, an impressive total that establishes IRM as a series player in the space.
Cell Tower: (Final Grade: B) Remarkably, despite reporting solid earnings results with 13.5% FFO growth in 2021 and providing guidance calling for another year of mid-to-high-single-digits FFO growth in 2022, American Tower (AMT) and Crown Castle (CCI) are in “bear market” territory for the first time since the Great Financial Crisis. Pressure from the growth-to-value rotation has combined with concerns over the longer-term technological outlook given the potential looming competition from Low-Earth-Orbit (“LEO”) satellite networks. We continue to believe that while ground-based towers will likely remain the superior technology for the vast majority of applications, the mere presence of another option does have the potential to disrupt the highly-favorable industry dynamics enjoyed by tower REITs over the last decade, so caution is warranted given their massive weight in cap-weighted REIT indexes.
Office, Hotel, & Casino Earnings Recap
Office: (Final Grade: B+) While WFH headwinds will persist, the office REIT outlook has brightened in recent months – particularly for REITs focused on more business-friendly Sunbelt regions – as demand for office space has remained resilient even as physical utilization rates remain below 50% across most major markets. Office REITs reported 5.9% FFO growth in 2021, on average, which was roughly 4% below their pre-pandemic levels in 2022. Eight office REITs eclipsed their prior full-year outlook led by solid results from sunbelt-focused REITs Highwoods (HIW) and Piedmont (PDM) and signs of resilience from several coastal-focused REITs Boston Properties (BXP) and Hudson Pacific (HPP) on strength in lab space demand.
Hotel: (Final Grade: A-) Helped by the growth-to-value rotation and by signs that the pandemic may finally be ending once-and-for-all, hotel REITs are the best-performing REIT sector this year. Encouragingly, recent TSA Checkpoint data has shown signs of reacceleration in the domestic travel recovery after an Omicron-driven slowdown with the seven-day average climbing above 90% of pre-pandemic levels last week for the first time since the pandemic began. Upside standouts have been Apple Hospitality (APLE), which became the first hotel REIT to meaningfully restore its dividend. Host Hotels (HST) has also been an outperformer after reporting strength in its Sunbelt markets and projecting robust summer leisure travel demand along with the long-awaited return of business travel and convention/group demand.
Casino: (Final Grade: B) Perhaps the most notable development came not from one of the three casino REITs, but rather from net lease REIT Realty Income (O), which announced its first major move into the casino real estate business by announcing that it will acquire all of the land and real estate assets of Encore Boston Harbor from Wynn Resorts for $1.70 billion in cash, representing a 5.9% cap rate and entered into a sale-leaseback transaction where Wynn Resorts will continue to operate the property. The lease will have an initial term of 30 years with one thirty-year tenant renewal option and rents will escalate at 1.75% for the first 10 years and the greater of 1.75% and the CPI increase (capped at 2.5%) over the remainder of the lease term – terms that are fairly typical across the major casino REITs.
Retail REIT Earnings Recap
Malls: (Final Grade: B-) Mall REITs were the best-performing REIT sector in 2021 – nearly doubling in value amid hopeful signs of stabilizing fundamentals – snapping a dreadful six-year-long streak of underperformance. Simon Property (SPG) reported that its full-year FFO exceed its 2019-level in 2021, helped by strong return on non-mall investments, but Tanger (SKT) and Macerich (MAC) remain 20-40% below pre-pandemic levels and the 2022 outlook from all three mall REITs were a bit softer than expected. On the upside, store closings declined to record-lows in 2021 with openings outpacing closings for the first time since 2014. Secular headwinds on the mall format will persist, but we see some targeted opportunities as the outlook for higher-tier retail assets has brightened while valuations appear reasonably attractive.
Shopping Center: (Final Grade: A-) Unlike their mall REIT peers, shopping center REITs are seeing significantly better fundamentals in the post-pandemic period as big box retailers have doubled down on using their brick and mortar properties as hybrid “distribution centers” in a decentralized last-mile delivery network. Shopping Center REITs reported average FFO growth of nearly 16% in 2021 with a handful of REITs now back above their pre-pandemic FFO levels. Same-store NOI growth averaged 9.0% in 2021 led by Regency Centers (REG) and Urstadt Biddle (UBA). Trends in occupancy rate and rent spreads have been most impressive with leasing spreads rising by double-digit rates in Q4 while average occupancy rates climbed to the highest level since 2015, indicating clear signs of pricing power for the first time in a decade.
Net Lease: (Final Grade: A-) Thriving in the “lower for longer’ macroeconomic environment that defined the 2010s, the new regime of higher inflation has raised questions about these REITs’ ability to continue to outperform, but net lease REITs have so far proven that external growth can more-than-offset the drag from negligible same-store growth. Net lease REITs acquired nearly $15 billion in assets in 2021 – the highest on record and representing about 20% of their overall market value – and the outlook for 2022 calls for a similar level of activity. Upside standouts this earnings season included Spirit Realty (SRC), which delivered the strongest FFO growth in 2021 among the six largest REITs, and EPR Properties (EPR), which reported an impressive rebound in 2021 and solid momentum into 2022 following the punishing declines in 2020.
Homebuilders & Timber REITs
Homebuilders: (Final Grade: B+) The jump in mortgage rates has pressured homebuilders this year and pulled the sector into “bear market” territory despite a very strong slate of earnings reports and strong guidance for 2022 calling for double-digit EPS and revenue growth. Homebuilder margins were particularly impressive in their recent reports as builders have more-than-offset increased costs through higher sales values. Despite the tough comparable, builders reported a nearly 4 percentage-point increase in operating margins to the highest overall average on record. The longer-term outlook for the housing industry remains highly promising as demographic-driven growth in household formations, combined with the lingering housing shortage resulting from a decade of underbuilding, remain secular tailwinds, and a return to sustainable “trend-level” growth in home prices is a welcome sign to prolong the secular growth trends deep into this decade.
Timber: (Final Grade: B) One of the stronger-performing sectors this year, timber REITs reported solid earnings results with PotlatchDeltic (PCH) and Weyerhaeuser (WY) each reporting record-growth across all metrics in 2021. PCH delivered full-year revenue growth of nearly 30%, powering a 71% rise in Adjusted EBITDA and a 153% surge in Earnings Per Share. The company provided solid Q1 guidance and commented that “2022 is off to a great start with the recent surge in lumber prices benefitting both our Timberlands and Wood Products businesses. We expect housing-related fundamentals that drive demand in our business to remain favorable.” Rayonier (RYN) gained 3% after reporting solid results with its adjusted EBITDA topping its prior guidance and expects its EBITDA to remain at record levels in 2022 in its initial outlook.
Specialty REIT Sectors
Billboard: (Final Grade: A) Lamar Advertising (LAMR) has been among the standouts this earnings season, reporting strong results which included a 10% dividend hike to $1.10, which is above its pre-pandemic rate of $1.00. LAMR recorded full-year FFO growth of 29%, which was 13% above its pre-pandemic level in 2019, a rather remarkable turnaround over the past 18 months. Outfront (OUT) also surged after reporting similarly impressive momentum with its AFFO back above pre-pandemic levels in Q4 and tripling its dividend to $0.30. That said, the outlook for LAMR – which has less exposure to public transit advertising than OUT – continues to be more favorable with guidance calling for FFO growth of another 8% this year.
Cannabis: (Final Grade B+) Innovative Industrial (IIPR) has pulled back more than 25% this year, but fundamentals surely aren’t to blame as IIPR reported another impressive quarter, recording full-year AFFO growth of 78% driven by investment volume of $714M. Importantly, IIPR has continued to source external growth opportunities, acquiring 31 additional cannabis-related properties in Q4 and early 2022, bringing its portfolio up to 105 properties. IIPR has delivered the strongest FFO and dividend growth of any REIT over the past five years and yet trades at Price-to-FFO multiples that are essentially in-line with the REIT sector average, representing an attractive valuation entry-point for a REIT that has established a genuine competitive moat and a track record that can’t be ignored.
Earnings Recap: REITs Now Looking Cheap
Despite the strong slate of earnings reports across most property sectors, performance trends continue to be dominated by macroeconomic factors, notably the “rates up, REITs down” paradigm that has pulled REIT valuations back towards “cheap” levels. Critically, the initial outlook for 2022 was impressive across most property sectors, reflecting a high degree of confidence among REIT executives that the growth momentum will be sustained beyond the initial post-pandemic recovery and amid the rising rate environment. The thesis for maintaining an overweight allocation to U.S. real estate equities in a balanced portfolio remains especially compelling given their minimal international exposure and inflation-hedging attributes.
For an in-depth analysis of all real estate sectors, be sure to 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, Storage, Timber, Prisons, 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.