Earnings Preview: A REIT Revival?
Real estate earnings season kicks into gear this week, and over the next month, we'll hear results from 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. The sector with perhaps the most to gain from Fed rate cuts, REITs enter earnings season with upside momentum after a dismal two-year stretch, including 50 percentage-points of market underperformance. Since the start of last earnings season in mid-April, the Equity REIT Index has gained 14.0%, outpacing the 12.8% gains from the S&P 500, led by small-caps and rate-sensitive REITs.
IYR: Cost Of Capital Only Comes Down In Adverse Economic Scenario
To begin with, we are not major fans of ETFs of REITs, since REITs themselves are already asset portfolios and more layering is unnecessary and costly at 0.4% expense ratio. IYR is underperforming because of high costs of capital, and we think high or even higher costs of capital are the status quo for the foreseeable future. An adverse economic scenario could bring down costs of capital, which would be a net positive only for some of the REITs in IYR, with others being exposed on demand-side.
