After looking at the raw numbers, let’s look at the price performance of the Real Estate sector during the reporting season.
Prologis (PLD) kicked off the Q1 earnings period on the 18th of April with a beat while Regency Centers (REG) was the last to report on the 9th of May (also beating EPS estimates).
During this 21 day period (16 trading days), the various ETFs representing the Real Estate sector performed as follows:
Vanguard REIT ETF (VNQ): -4.58%
iShares Cohen & Steers REIT ETF: (ICF): – 3.95%
iShares U.S. Real Estate ETF (IYR): -3.70%
Real Estate Select Sector SPDR Fund ETF (XLRE): -3.02%
This is how VNQ‘s chart looks like, where the green and red vertical lines represent the beginning and the end of the reporting season respectively:
Out of the 16 trading days, only 5 were up, and the ETF closed the period with a 4.58% loss on the 9th of May. Price fell from YTD highs and above the 200 day MA to YTD lows. Volume was increasing and above average.
What could be the reason(s) for this decline? Q1 results came in above estimates, although guidance was negative and future estimates were lowered. Was this the only reason?
Given Real Estate is considered to be a “bond-like” sector, the movement of long-term yields can have a serious effect.
Here is the 10y Treasury yield, where green and red vertical lines signal the same period as above:
During this 16 trading days, the benchmark 10y yield shot up 15 basis points from 2.25% to 2.40%, which contributed a great deal to REIT underperformance (the S&P 500 Index was up about 2%).
The most concerning for me is the behavior of the VNQ versus the 10y yield: as the 10y now trades around the same level as at the beginning of the reporting period, VNQ is not even close to its previous high. It briefly touched its 200 day MA line, but reversed to the downside and headed back to the lows.
At the reversal from the 200 day MA price formed a classic chart pattern called Evening Star, which acts as a bearish reversal pattern 72% of the time. Although the uptrend leading to the Evening Star pattern was a minor one, this is a warning sign, together with the failed breakout above the 200 day MA.
Disclosure: We are long VNQ.