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Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Daily Recap

  • A renewed sell-off in large-cap technology stocks dragged U.S. equity markets lower Wednesday despite dovish comments from Federal Reserve Chair Powell and solid retail sales and strong housing data.

  • After gaining ground on Monday and Tuesday, the S&P 500 finished lower by 0.4% today while the tech-heavy Nasdaq 100 dipped 1.6% after a reported FTC anti-trust probe into Facebook.

  • Real estate equities outperformed again today. The broad-based Equity REIT ETF finished higher by 0.5% with 13-of-18 property sectors in positive territory, led by the shutdown-sensitive mall and student housing sectors.

  • Homebuilder Sentiment jumped to the strongest levels on record in September, driven by a surge in Home Buyer Traffic, which far exceeded previous record levels.

  • Perhaps a "close second" to the housing industry in the velocity and magnitude of its V-shaped rebound has been the retail industry, which has regained all of the lost ground during the pandemic.

Real Estate Daily Recap

A renewed sell-off in large-cap technology stocks dragged U.S. equity markets lower Wednesday despite dovish comments from Federal Reserve Chair Powell and solid retail sales and strong housing data. After gaining 2% through the first two trading days this week, the S&P 500 ETF (SPY) finished lower by 0.4% while the tech-heavy Nasdaq 100 (QQQ) dipped 1.6%. Real estate equities outperformed again today as the broad-based Equity REIT ETF (VNQ) finished higher by 0.5% with 13 of 18 property sectors in positive territory, led by the shutdown-sensitive mall and student housing sectors. The Mortgage REIT ETF (REM), meanwhile, gained 1.6% today.

Today's late-day sell-off came despite assurances from the Federal Reserve that it would keep interest rates near zero for at least three more years and continue to provide monetary support “until labor market conditions have reached maximum employment and inflation is on track to moderately exceed 2% for some time.” 5 of the 11 GICS equity sectors finished in positive territory today, led by a surge in Energy (XLE) sector Hurricane Sally, which hit Alabama this morning as a Category 2 storm, pressures oil supply levels. Homebuilders and the broader Hoya Capital Housing Index finished higher today following record-high homebuilder sentiment data and solid retail sales data in the housing-related categories.  

Helping to power the equity market rally over the last five months has been data showing a dramatic rebound in housing market activity, perhaps the most critical sector of the U.S. economy. Following a record plunge in April back to the lowest levels since 2011, Homebuilder Sentiment has now fully recovered all of the lost ground, climbing to new record-highs in September. All three subcomponents gained last month, Current Sales jumping to 88, Future Sales rising to 84, and Home Buyer Traffic rebounded to 73, far exceeding the highest level of record. The Mortgage Bankers Association, reported today that mortgage applications to purchase a single-family home are now higher by 6% from the same week last year, the 17th straight week of positive year-over-year growth following a sharp plunge in mortgage demand in March and April. 

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. Aided by the WWII levels of fiscal stimulus over the last several months, retail sales jumped to all-time record highs on an annualized basis in August, climbing 0.6% from last month and 2.6% from the same month last year. Naturally, e-commerce sales have led the charge this year with online sales now higher by nearly 25% from last year while brick and mortar sales are now flat on from last year. While there may be enough "saved-up-stimulus" to keep sales rolling in September, the path forward for retail sales in months ahead becomes less certain if a fiscal stimulus agreement can't be reached.

Food services and drinking places (bars and restaurants) rebounded in August as more states and cities lifted lockdown measures, but this category remains lower by 15% from last August. Naturally, housing-related retail categories have seen a similar resurgence in recent months as the homebuilders themselves as the Building Materials category is second-only to e-commerce as the top-performing retail category with a 15.4% higher sales rate than last year. As we've discussed for several months, the building materials category - which includes Home Depot (HD) and Lowe's (LOW) - has been a notable positive standout during the pandemic, reflecting the continued resilience of the housing sector and the fact that households have exhibited a propensity to prioritize investments in home improvement amid the "work-from-home" era.

Commercial Equity REITs

Today, we published Data Center REITs: Sunlight Through COVID Clouds. A "cloudy" future lies ahead, but that's good news for data center REITs. The physical epicenter of the "cloud," data centers have been the best-performing property sector amid the pandemic. Clear winners of the work-from-home era, corporations will increasingly shift spending on physical office space towards "digital office space" through investments in remote-work infrastructure. Leasing activity - the most closely-watched earnings metric - surged in the second quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. While expensive, the "essential" property sectors - technology, housing, and industrial - are the lone areas of reliable growth within the REIT sector.

It was a slower day of REIT newsflow after a frenetic slate of news flow on Monday and Tuesday that saw several dividend increases and a dozen rent collection updates. On the dividend-front, we're in the heart of declaration season we've seen about a dozen dividend announcements over the last 24 hours. All equity REITs on the docket have maintained distributions at current levels including AvalonBay (AVB), Equity Residential (EQR), and Camden Properties (CPT), which had previously raised their distribution levels earlier this year. We've now tracked 28 equity REITs that have raised dividends in 2020 - primarily in the "essential" property sectors - technology, housing, and industrials - compared to the 64 equity REITs that have reduced or suspended their dividend.

We also heard a flurry of rent collection and business updates this morning and this afternoon. Industrial REIT PS Business Parks (PSB) announced that it collected 95% of August rents and 93% of July rents. Healthcare REIT National Health Investors (NHI) announced that it collected 96.6% of rents in September. Meanwhile, the National Multifamily Housing Council's Rent Tracker found that 86.2% of rents paid their rent by September 13, which was a modest 2.4 percentage points from the collection rate last year and roughly in-line with prior months, suggesting that the predict sharp drop in rent collection amid the "fiscal cliff" has not yet been borne out in the data.

Finally, we also heard a business update from Host Hotels & Resorts (HST), which announced that occupancy was 18.9% in August, which was actually a solid improvement from July's occupancy rate around 13% as the REIT's urban focus has proven to be a liability in the COVID era. By comparison, Apple Hospitality (APLE), which owns a more suburban-focused asset portfolio, announced yesterday that all 225 of its hotels are currently open and the company was "cash flow positive" in July with occupancy rising above 50% in the first week of September. Earlier in the week, Park Hotels & Resorts (PK) announced that it has reopened 14 hotels since June, increasing the total number of hotels open to 46 of 60 hotels (77%), or 59% of total room count. Occupancy improved to 32.3% for Park’s 33 open hotels during July and 38.8% during August. STR data has shown a steady improvement in national occupancy to roughly 50% in August and these improved levels have held in recent weeks despite seasonal headwinds.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs gained 2.3% today and pushed their week-to-date gains to 6.4%. Commercial mREITs finished higher by 1.0% today to push their weekly gains to 2.9%. Leading the way today were Granite Point (GPMT), New York Mortgage Trust (NYMT), and Ares Commerical (ACRE). Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

Once again, we saw a flurry of dividend announcements in the mREIT sector over the last 24 hours. Anworth Mortgage (ANH) and TPG Real Estate (TRTX) maintained dividends at current levels, which remained below their pre-pandemic level. On the other hand, Ares Commerical (ACRE), Blackstone Mortgage (BXMT), KKR Real Estate (KREF), and maintained payouts at current levels, which were in-line with pre-pandemic levels. Arbor Realty (ABR) remains the only mREIT that increased its dividend in 2020 to levels above 2019 payouts.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.41% today, on average, but underperformed their respective common stock issues by an average of 0.99%.  Among REITs that offer preferred shares, the performance of these securities has been an average of 18.68% higher in 2020 than their respective common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of “participating” preferred offerings that can be converted into common shares.

This Week's Economic Calendar

We're in the middle of a busy week of economic and housing data. Today, we saw Homebuilder Sentiment for September, which surged to record-high levels. We also saw Retail Sales data for August, which maintained the V-shaped recovery as retail spending exceeded pre-pandemic levels again in August. On Thursday, we'll see Housing Starts and Building Permits for August. Housing Starts jumped 22.6% last month to a seasonally adjusted annual rate of 1.50 million units while Building Permits rose 18.8% to a rate of 1.50 million units. We'll also be watching Jobless Claims data on Thursday.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

  • Alex Pettee, CFA
  • A "cloudy" future lies ahead, but that's good news for data center REITs. The physical epicenter of the "cloud," data centers have been the best-performing property sector amid the pandemic.

  • Clear winners of the work-from-home era, corporations will increasingly shift spending on physical office space towards "digital office space" through investments in remote-work infrastructure.

  • Leasing activity - the most closely-watched earnings metric - surged in the second quarter to the highest level on record as the sector continues to ride substantial secular tailwinds.

  • Battle For the Clouds. Risks remain as intense competition from the hyperscale giants – Amazon, Microsoft, and Google - and relentless supply growth have weakened pricing power and AFFO growth.

  • Data center REITs have made the right moves to fend-off competitive threats through consolidation and internal development. While expensive, the "essential" property sectors - technology, housing, and industrial - are the lone areas of reliable growth within the REIT sector.

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Daily Recap

  • U.S. equity markets finished higher Tuesday led by a rebound in technology stocks following strong economic data out of China as investors await a busy slate of U.S. economic data.

  • After gaining 1.3% yesterday, the S&P 500 finished higher by 0.5% while the tech-heavy Nasdaq 100 jumped 1.4% following yesterday's 1.7% gains. The Dow Jones Industrial Average finished flat.

  • After jumping 2.5% yesterday, real estate equities again led the gains today as the broad-based Equity REIT ETFs finished higher by 1.2% today with 13 of 18 sectors in positive-territory.

  • It was a frenetic day of REIT news flow with a flurry of rent collection updates and dividend announcements. STORE Capital (STOR) and Innovative Industrial (IIPR) each raised their dividend. 28 equity REITs have boosted payouts in 2020 while 64 have reduced distributions.

  • Homebuilders Lennar (LEN) and MDC Holdings (MDC) each reported strong results as the housing industry continues to lead the recovery, but surging lumber prices may constrain potential upside in gross margins.

Real Estate Daily Recap

U.S. equity markets finished higher Tuesday led by a rebound in technology stocks following strong economic data out of China as investors await a busy slate of U.S. economic data over the next 48 hours. After gaining 1.3% yesterday, the S&P 500 ETF (SPY) finished higher by 0.5% while the tech-heavy Nasdaq 100 (QQQ) jumped 1.4% following yesterday's 1.7% gains. After jumping 2.5% yesterday, real estate equities again led the gains today as the broad-based Equity REIT ETF (VNQ) finished higher by 1.2% today with 13 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM), meanwhile, declined by 0.9% after gaining 3.4% yesterday.

The rebound in technology shares today follows two weeks of selling pressure that pushed the Nasdaq 100 into "correction territory" with declines of more than 10%. 8 of the 11 GICS equity sectors finished in positive territory today, led by the Communications (XLC), Real Estate (XLRE), and Technology (XLK) sectors while the Energy (XLE) and Financials (XLF) sectors lagged. Investors will parse a busy slate of economic and housing data over the next two days including Retail Sales and Homebuilder Sentiment tomorrow and Housing Starts and Building Permits on Thursday, as well as weekly Jobless Claims. 

Homebuilders and the broader Hoya Capital Housing Index finished mostly lower today despite a strong slate of earnings results over the last 24 hours. Lennar (LEN) finished lower despite reporting that net orders jumped 16% from last year to 15,564 homes, but fourth-quarter guidance was a bit light as surging lumber prices may constrain potential upside. Fellow homebuilder MDC Holdings (MDC) jumped more than 4%, however, after reporting stellar results with net orders for the first two months of Q3 increasing 75% year-over-year. As we discussed early last quarter in Homebuilders: Signs Of V-Shaped Recovery, the sharp rebound in housing market activity has been aided by longer-term macroeconomic trends of favorable millennial-led demographics, historically low housing supply, near-record low mortgage rates, and a potential post-pandemic "suburban revival." 

Commercial Equity REITs

It was a frenetic day of REIT newsflow with a flurry of rent collection updates and dividend announcements. Since July, we've seen more dividend increases than dividend cuts in the REIT sector, including two more dividend boosts today. Cannabis-focused net lease REIT Innovative Industrial (IIPR) declared a $1.17/share quarterly dividend, a 10.4% increase from prior dividend of $1.06 and the second dividend increase this year. Net lease REIT STORE Capital (STOR) declared a $0.36/share quarterly dividend, a 2.9% increase from prior dividend of $0.35. We've now tracked 28 equity REITs that have raised dividends in 2020 - primarily in the "essential" property sectors - technology, housing, and industrials - compared to the 64 equity REITs that have reduced or suspended their dividend. 

We also heard a flurry of rent collection and business updates this morning and this afternoon. Shopping center REIT Weingarten Realty (WRI) reported that it collected 91% of rents in August and 94% in July, and increased its Q2 collection to 94% as well, up roughly 20 percentage points from their initial report. Tanger Outlets (SKT) surged more than 10% today after it reported that it collected 81% of July rents, up from the 77% previously reported. Q2 collections improved to 40% from 33% previously reported while foot traffic over the last six weeks has averaged 89% of prior-year levels. Office REIT Cousins Properties (CUZ) reported that it collected 98% of August rent. Rexford Industrial (REXR) noted that it collected 96.2% of August rents and 96.4% of July rents, roughly in-line with pre-pandemic levels.

Apple Hospitality (APLE) gained nearly 5% today after it announced that all 225 of its hotels are currently open and the company was "cash flow positive" in July with occupancy rising above 50% in the first week of September. Yesterday, Park Hotels & Resorts (PK) announced that it has reopened 14 hotels since June, increasing the total number of hotels open to 46 of 60 hotels (77%), or 59% of total room count. Occupancy improved to 32.3% for Park’s 33 open hotels during July and 38.8% during August. STR data has shown a steady improvement in national occupancy to roughly 50% in August and these improved levels have held in recent weeks despite seasonal headwinds.

We heard some M&A news as well. Preferred Apartment Communities  (APTS) is reportedly in advanced talks with TPG in which the private equity firm would buy an eight-property student housing portfolio from the REIT for about $480M, a portfolio that includes properties at Florida State, Baylor, and Arizona State. Yesterday we noted that American Campus (ACC) announced that its portfolio is 90.3% leased for the 2020-2021 academic year, a rate far above the potentially catastrophic figures some investors feared given the lingering school shutdowns. As noted in Student Housing REITs: School's Out Forever, students at these flagship universities in these "college towns" have shown a desire to live on-or-near campus regardless of whether classes are held physically in-session or completed remotely.

Last but not least, American Tower (AMT) gained nearly 5% after it signed a new milestone multi-year agreement covering site access with T-Mobile (TMUS), which recently combined with Sprint to form a viable 3rd competitor in the U.S. cellular carrier industry. The companies expect that the new 15-year deal will enhance T-Mobile's access to American Tower's sites, while providing long-term revenue growth visibility to American Tower and also allowing T-Mobile to increase momentum on its rapid 5G deployment. We discussed trends in the sector in Cell Tower REITs: Fireworks Abound.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs declined by 0.1% but remain higher by 3.9% on the week. Commercial mREITs finished higher by 0.1% today to push its weekly gains to 2.1%. As with the equity REIT sector, we also saw a flurry of dividend announcements in the mREIT sector today. Ready Capital (RC) declared a $0.30/share quarterly dividend, a 20% increase from prior dividend of $0.25, but still below its pre-pandemic level of $0.40. New York Mortgage Trust (NYMT)declared a $0.075/share quarterly dividend, 50% increase from prior dividend of $0.050, but still below its pre-pandemic level of $0.20. Meanwhile, Chimera Investments (CIM) and Dynex Capital (DX) each maintained dividends at prior levels. Arbor Realty (ABR) remains the only mREIT that increased its dividend in 2020 to levels above 2019 payouts. Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.3% today, on average, but underperformed their respective common stock issues by an average of 0.7%. Digital Realty (DLR) announced today that it is redeeming all of its Series G (DLR.PG) preferred stock on October 15. The issue had an initial call date in April 2018 and was trading at a slight premium to par value before the announcement. Last week, the firm announced the redeemed it's Series I preferred stock (DLR.PI). Among REITs that offer preferred shares, the performance of these securities has been an average of 19.4% higher in 2020 than their respective common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of “participating” preferred offerings that can be converted into common shares.

This Week's Economic Calendar

We have a busy slate of economic and housing data in the week ahead. On Wednesday, we'll see Homebuilder Sentiment for September, which unexpectedly surged last month to record-high levels. Also on Wednesday, we'll see Retail Sales data for August, which had completed the V-shaped recovery last month as retail spending exceeded pre-pandemic levels. On Thursday, we'll see Housing Starts and Building Permits for August. Housing Starts jumped 22.6% last month to a seasonally adjusted annual rate of 1.50 million units while Building Permits rose 18.8% to a rate of 1.50 million units. As usual, we'll also be watching the weekly Mortgage data on Wednesday and Jobless Claims data on Thursday.

Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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