Real Estate Weekly Outlook
Go Big or Go Home? U.S. equity markets delivered their best week in three months, driven by solid employment and housing market data and renewed hope for a compromise on the ever-elusive fiscal stimulus compromise that has been seemingly dangled in front of investors for two months. The on-again-off-again status of stimulus negotiations whipsawed equity markets throughout the week, ending on a high note after President Trump proclaimed that he would like to “Go Big” on a relief package.
Following gains of 1.6% last week, the S&P 500 ETF (SPY) surged 3.9% this week, climbing back within 3% of its all-time highs set on September 2nd. The gains this week were again led by the Small-Cap (SLY) and Mid-Cap (MDY) indexes, which have jumped by 10% since the start of last week, showing signs of life in recent weeks after underperforming the large-cap indexes since the start of the pandemic. Coming off its best week since July, the Equity REIT ETF (VNQ) finished higher by another 1.3% this week with 9 of 18 property sectors in positive territory while Mortgage REITs (REM) gained 1.4%, adding to last week’s gains of 3.8% last week.
While more stimulus will certainly be appreciated by equity markets and by the Federal Reserve, strong economic data over the last month – which pushed the Citi Economic Surprise Index back towards record-high levels – has reduced the sense of obvious urgency to expand the already-unprecedented level of fiscal stimulus measures in the eyes of some lawmakers. All 11 GICS equity sectors finished higher on the week, led a surge from the Materials (XLB), Energy (XLE), Utilities (XLU), and Technology (XLK) sectors. Strong earnings from homebuilding products company PPG, Inc. (PPG) helped to power Hoya Capital Housing Index to another week of solid gains as the housing industry continues to lead the early stages of the post-pandemic recovery.
Real Estate Economic Data
Below, we recap the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.
On that point, the Mortgage Bankers Association reported this week that mortgage applications to purchase a single-family home are now higher by 21% from last year, showing few signs of cooling from red-hot levels, while refinancing applications are now higher by 50%. The 30-Year Fixed Mortgage Rate declined to fresh record-low levels at 3.01%. As discussed earlier this month in Homebuilders: A V-Shaped Vendetta, New Home Sales, Pending Home Sales, and Existing Home Sales each climbed to the highest sales rates in over a decade in August as homes are seemingly being sold as fast as they can be built. Next week, we’ll see Homebuilder Sentiment data which last month climbed to record highs, driven by a surge in prospective buyer traffic.
Data from the Department of Labor showed that Initial Jobless Claims ticked slightly lower to 840k from last week’s upwardly revised 849k and roughly steady with the levels over the last month. Continuing Claims, however, decreased to 10.98 million, down exactly one million from last week. Since the peak in early May at around 25 million, Continuing Claims have retreated by 13.9 million. Last week, the Bureau of Labor Statistics reported that the U.S. economy added 661k jobs in September – slightly below economists’ estimates for gains of 860k, but private payrolls actually beat estimates with gains of 887k. The “headline” unemployment rate, however, ticked down to 7.9% from 8.4% in the prior month, also better than estimates.
Commercial Equity REITs
We heard a handful of more business updates and rent collection reports over the last week ahead of the start of Q3 earnings season which kicks off on October 20th. Industrial REIT Terreno Realty (TRNO) jumped 6.6% this week after it provided a pre-earnings update in which it announced that it achieved a 20.3% increase in cash rents on new and renewed leases in Q3 and a 25.2% increase year-to-date. TRNO is one of 29 equity REITs to have raised dividends in 2020 to levels above their pre-pandemic rates, primarily in the “essential” property sectors – technology, housing, and industrials. While not a REIT, homebuilder KB Home (KBH) raised its dividend by 67% this week, following in the tracks of Lennar (LEN), which doubled its dividend last week.
Underscoring the resilient strength of the U.S. housing sector, while much has been written over the past four months about the potentially devastating effects on the rental markets from the July 31st expiration of several relief measures offered by the Cares Act in July, so far these dire forecasts have not come to fruition. Quite the opposite, in fact, as the National Multifamily Housing Council’s (NMHC) Rent Payment Tracker found 79.4% of apartment households paid their rent by October 6, which was back in line with the pre-pandemic rate last October. While another round of fiscal stimulus will certainly be welcomed by landlords, we continue to point out that the existing fiscal stimulus measures are already the most significant since WWII as personal incomes have actually increased by 4.7% from last year.
Sticking on the housing theme, Invitation Homes (INVH) gained 1.1% this week after it announced that it is teaming up with Rockpoint Group in a joint venture partnership to deploy over $1B to acquire and renovate single-family homes in the Western and Southeast US. This week we published Manufactured Housing REITs: Not Enough Homes, So Onto Boats. Manufactured housing REITs – Equity Lifestyle (ELS) and Sun Communities (SUI) – have proven to be relatively immune from coronavirus-related headwinds that have slammed much of the real estate sector, collecting nearly 100% of rents while also boosting dividends this year. Amid this housing shortage, MH REITs have begun investing in a new – but fundamentally similar – asset class: boat marinas. MH REITs aren’t cheap, but long-term fundamentals remain stellar for this “essential” property sector.
Retail and net lease REIT also continue to report improving rent collection metrics, which bodes well for better dividend news during Q3 earnings season. Shopping center REIT Federal Realty (FRT) finished fractionally lower this week after it announced that it collected 83% of third-quarter rents, up from its initially-reported Q2 collection rate of 68%. Net lease REIT American Finance Trust (AFIN) gained 1.4% this week after it announced that it collected 91% rent 3Q rents. Meanwhile, Global Net Lease (GNL) finished lower by 2.5% this week despite announcing that 97% of the original cash rent due for the third quarter of 2020 has been received. AFIN and GNL are two of 65 equity REITs to have reduced or suspended its dividend this year, nearly half of which have come from REITs with heavy retail exposure.
Speaking of struggling sectors, this week, we published Prison REITs: The End Is Near. Prison REITs – the darkest corner of the REIT sector – have been slammed in 2020 as pandemic-related operational struggles have clashed with ever-intensifying political headwinds. CoreCivic (CXW) eliminated its dividend and announced it is abandoning the REIT structure, while GEO Group (GEO) reduced its dividend and likely isn’t far behind in a shift of corporate structure to either a c-corporation or private entity. In the event of an “abolishment” of private prisons at the Federal and/or state level, we see these companies utilizing a lease structure more akin to a ground lease, but based on the underwhelming reaction to CXW’s shift in corporate structure and strategy, it’s unclear whether equity shareholders would ever ultimately be rewarded.
Sticking on the theme of struggling sectors, hotel REIT Ashford Hospitality Trust (AHT) dipped another 11.9% this week after the company failed to receive enough votes to pass a controversial proposal which would force the “highly dilutive” conversion of all preferred stock into common stock. The preferred shares, however, rallied more than 20% this week on the news. Last week, we published Hotel REITs: Winter Is Coming where we discussed how hotels REITs are essentially a “pure play” on the near-term success of a coronavirus vaccine. The balance of risks for the better-capitalized hotel REITs may be skewed to the upside, however, with dozens of vaccines and therapeutics in the pipeline led by Moderna (MRNA), Pfizer (PFE) and BioNTech (BNTX), and AstraZeneca (AZN).
Meanwhile, EPR Properties (EPR) dipped 13.5% this week on news that more than 500 movie theaters controlled by U.K-based Regal Entertainment Group will temporarily suspend operations, citing the “lack of product” amid the postponement of many blockbuster films. We discussed the net lease sector’s exposure to movie theaters in Net Lease REITs: Reopening Revival. Last but not least, Iron Mountain (IRM) gained 3.3% this week after it announced the formation of a €300M joint-venture to design and develop a large hyperscale data center in Frankfurt, Germany. We discussed trends in the data center sector last month in Data Center REITs: Sunlight Through COVID Clouds. Data centers are currently less than 10% of IRM’s revenues.
Coming off a week of strong gains, mortgage REITs delivered mixed performance as residential mREITs gained 1.5% while commercial mREITs gained 0.2%. It was a fairly quiet week of news flow as investors anxiously await the start of Q3 earnings season which should be flush with updated dividend plans and book value estimates. AGNC Investment (AGNC) declared a $0.12/share monthly dividend, in line with its previous (reduced) rate. Ellington Financial (EFC) also declared $0.09/share monthly dividend, also in line with its previous (reduced) rate. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised.
Signs of continued stabilization in the mortgage markets – and outright strength in the broader U.S. housing markets – have been the driving force behind the sharp rebound in mortgage REIT shares from their lows in early April. The latest data and commentary from Black Knight (BKI) showed that the number of Americans in active forbearance on their mortgages saw the largest single-week decline on record last week as the first wave of forbearances from April are hitting the end of their initial six-month term. The national forbearance rate has decreased to 5.6%, down from a peak of roughly 9% in late May. Active forbearances fell below 3 million for the first time since mid-April and an additional 800K forbearance plans are slated to reach the end of their initial six-month term in the next 30 days.
Last quarter, we published REIT Preferreds: Higher Yield Without Excess Risk. The InfraCap REIT Preferred ETF (PFFR) ended the week higher by 0.8% but remains lower by 11.5% on the year. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.91% higher in 2020 than their common shares. As mentioned above, the preferred shares of Ashford Hospitality (AHT) jumped by 20% this week on average amid the ongoing saga surrounding the troubled hotel operator. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively more limited upside potential outside of the limited number of “participating” convertible preferred offerings.
2020 Performance Check-Up
For the year, Equity REITs are now lower by roughly 14.8% and Mortgage REITs are off by 39.9% compared with the 7.8% gain on the S&P 500 and the 0.3% gain on the Dow Jones Industrial Average. Five of the 18 REIT sectors are in positive territory for the year, while on the residential side, five of the eight U.S. housing industry sectors in the Hoya Capital Housing Index are in positive territory for the year. The gap between the best-performing REIT sector – data centers – and worst-performing REIT sector – regional malls – remains a whopping 85% in 2020. At 0.78%, the 10-year Treasury yield (IEF) has retreated by 144 basis points since the start of the year and is roughly 250 basis points below recent peak levels of 3.25% in late 2018.
Next Week’s Economic Calendar
After a quiet week of economic data, we’ll see a busy slate of inflation, housing, and retail sales data in the week ahead. The Consumer Price Index for September is released on Tuesday and the Producer Price Index comes out on Wednesday. Inflation showed signs of life in the prior two months after most inflation metrics hit multi-decade lows in May and June. On Friday, we’ll see Retail Sales data for September and Homebuilder Sentiment data for October, both of which are coming off record-high levels. As it relates to an emerging V-shaped recovery, perhaps a “close second” to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic.
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Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund 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. Index definitions and a complete list of holdings are available on our website.
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Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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