2017 Q1 Earnings by the Charts

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:

Source: Bloomberg

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:

Source: Bloomberg

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.

 

Growth of $10,000 since July 2010

A great chart from one of my favorite Stocktwits contributors:

Source: charliebilello

Although the post is focusing on Gold vs Bitcoin (I can only trace back Bitcoin/USD till 07/23/2010), for me it was surprising to see US Real Estate on the 3rd place.

I have checked a few others as well that might be interesting (starting date: 07/23/2010, end date 05/12/2017, total returns, dividends reinvested in security):

ITB (US Home Construction): + 183.79%

XHB (US Homebuilders): + 158.82%

RWO (Global Real Estate): + 84.53%

TAO (China Real Estate): + 53.74%

TLT (10y US Treasury): + 49.10%

VNQI (Global ex-US Real Estate): + 35.62%

Source: Bloomberg

Real Estate Sector Breakout

The S&P 500 Real Estate Sector Index broke out to new YTD highs, while its relative strength ratio hit a new 65 day high.

It means that not only is the sector starting to gain momentum and establish a new uptrend (continue the uptrend on a higher timeframe), but it is also getting stronger relative to the broader market.

Source: Bloomberg

What is noteworthy is that this relative strength in the real estate sector is happening during a market correction/consolidation, while the US 10y yield is falling (from above 2.60 in mid-March to below 2.20 today). Since the US election, it was the other way around: stock market up, 10y yield up, and real estate relative underperformance.

Given the above, I see that properties are ahead of the following two paths: 1) the stock market continues higher with the US 10y yield marching higher = real estate relative weakness, or 2) the stock market tanks, in which case I don’t think real estate could hold on to its recent gains for long = real estate declines.

These are not the brightest options, but we should also take into account that the market always figures out something else. That’s why it is so interesting….

Disclosure: we are long VNQ

2017 Q1 Earnings Watch

Factset is out with the latest Earnings Insight for Q1 and future estimates. Although no Real Estate company has reported yet (Prologis (ticker: PLD) is the first on 04/18) from the S&P 500 Index, it is important to pay attention to current estimates versus the actual outcomes.

As of the report’s date, 7th of April, we can see the following estimates for Q1 ’17:

The Real Estate sector is close to the market average with 6,7% estimated YoY earnings growth rate. Compared to the Q4 actual growth rate of 15,2% it is a bit of a deceleration, but if you take into account the difference between the actual and the estimated numbers of Q4, we might be up for a surprise. I don’t know if Vornado Realty can surprise analysts again this quarter, but the estimate vs estimate comparison still shows some improvement (5,9% for Q4 vs 6,7% for Q1). It’s also positive that the Q1 estimate was 5,6% at the beginning of March.

Revenue is expected to increase by 2.5% in Q1 vs 3.7% in Q4 last year. This estimate has also increased from 2.2% at the beginning of March.

It is also important from a sentiment perspective that the earnings growth estimate for the S&P 500 Index at 8,9% is the highest since Q4 2013. If it turns out as estimated, or the companies beat estimates then bulls will have another excuse to remain bullish, bears will have another reason to call a top.