Homebuilders: Shortages Everywhere

• Homebuilders - which emerged as unexpected leaders early in the pandemic - dipped into "bear market territory" in early October as supply chain headwinds, soaring home prices, and rising rates spooked investors.

• Record-low supply levels and robust single-family housing demand sent home prices soaring, discouraging potential buyers. Surging rents - and a desire for inflation-hedging assets - have again sparked recent demand.

• Homebuilders are selling homes as fast as they can be built, but that's not fast enough. Supply chain constraints have curtailed immediate upside, but may have prolonged the favorable cycle.

• Rising rates remain a risk factor, but may have silver linings if it can bring some "normalcy" back to home price appreciation trends. Importantly, unlike past cycles, shortages are a far bigger concern than excesses.

• Housing remains a deeply “unloved” sector despite the compelling long-term tailwinds at its back. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.

Stocks Jump • REIT Dividend Boost • Inflation Records

Summary

• U.S. equity markets rallied Thursday as strong corporate earnings reports and encouraging employment data offset ongoing inflation concerns following data showing that producer prices soared by the most on record.

• Delivering its strongest gains since March, the S&P 500 gained 1.2% today while the Mid-Cap 400 finished higher by 1.7% and the Small-Cap 600 climbed 1.2%.

• Real estate equities were again among the leaders for the fourth-straight day as the Equity REIT Index gained 1.2% today with all 19 property sectors in positive territory.

• Net Lease REIT Agree Realty (ADC) boosted its dividend for the second time this year, raising its payout by 5%. ADC is one of 110 REITs that has raised its dividend thus far in 2021.

• Producer Prices rose 8.6% in September from the prior year - the fastest annual rate on record - but the month-over-month gain was also the slowest of the year.

Real Estate Daily Recap

U.S. equity markets rallied Thursday as strong corporate earnings reports and encouraging employment data offset ongoing inflation concerns following data showing that producer prices soared by the most on record. Delivering its strongest gains since March, the S&P 500 gained 1.2% today while the Mid-Cap 400 finished higher by 1.7% and the Small-Cap 600 climbed 1.2%. Real estate equities were again among the leaders for the fourth-straight day as the Equity REIT Index gained 1.2% today with all 19 property sectors in positive territory while Mortgage REITs climbed 0.4%.

Gains were broad-based toady as all eleven GICS equity sectors finished higher today, led to the upside by the Materials (XLB), Technology (XLK), and Industrials (XLI) sectors. While the annual rise in producer prices was the highest on record at 8.6%, the month-over-month gain in September was also the slowest pace of the year, sparking a bid for bonds as the the 10-Year Treasury Yield declined 3 basis points to 1.52% today after topping four-month highs at 1.60% last week. Homebuilders and the broader Hoya Capital Housing Index were also among the leaders today ahead of key earnings reports across the housing sector next week.

Equity REITs

Net Lease: Agree Realty (ADC) boosted its dividend for the second time this year, raising its payout by 5%. ADC is one of 110 REITs that has raised its dividend thus far in 2021. Elsewhere, a handful of REITs maintained their dividends at current levels including Office Properties Income (OPI) Industrial Logistics (ILPT), Service Properties (SVC), and STAG Industrial (STAG). Following the wave of pandemic-driven dividend cuts across the REIT sector last year, we've seen a similarly powerful wave of dividend increases this year.

Homebuilders: Tomorrow morning, we will publish Shortages Everywhere which will discuss recent trends in the homebuilding sector. Homebuilders - which emerged as unexpected leaders early in the pandemic - dipped into "bear market territory" in early October as supply chain headwinds, soaring home prices, and rising rates spooked investors. Record-low supply levels and robust single-family housing demand sent home prices soaring, discouraging potential buyers. Surging rents - and a desire an for inflation-hedging asset - have again sparked recent demand. Housing remains a deeply “unloved” sector despite the compelling long-term tailwinds at its back. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mixed today as commercial mREITs gained 0.6% and are now higher by 2.2% this week. Residential mREITs rose 0.2% to push their weekly gains to 1.4%. Sachem Capital (SACH) was among the leaders after holding its dividend rate steady at $0.12/share quarterly, representing a forward yield of 8.53%. This afternoon, Broadmark Realty (BRMK) declared a $0.07/share monthly dividend, also in line with its previous rate, representing a yield 8.35%. The average residential mortgage REIT now pays a dividend yield of 8.45% while the average commercial mortgage REIT pays a dividend yield of 6.66%.

Economic Data This Week

The busy slate of economic data concludes on Friday with Retail Sales data for September which is expected to show a moderation in spending and we'll get the first look at October Consumer Sentiment data following a historic plunge last month. We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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The REIT Forum is now the exclusive home to Hoya Capital premium research. Visit our website and join our email list for quick access to our real estate research library: HoyaCapital.com where we have links all of our real estate sector reports and daily recaps. You can also follow our real-time commentary on Twitter, LinkedIn, and Facebook.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.

Hot Inflation • Earnings Begin • Shopping Center IPO

Summary

• U.S. equity rebounded Wednesday in another choppy session as investors shrugged-off hotter-than-expected inflation data as earnings season kicks off with most of the major banks reporting over the next 48-hours.

• Snapping a three-session losing streak, the S&P 500 gained 0.3% today while the Mid-Cap 400 finished higher by 0.4% and the Small-Cap 600 climbed 0.1%.

• Real estate equities among the leaders for the third-straight day as the Equity REIT Index gained 0.7% today with 17-of-19 property sectors in positive territory. Mortgage REITs gained 0.3%.

• Not So Transitory? Consumer prices continued to rise near the fastest annual rate in decades in September, rising 5.38% year-over-year. Prices for food, rent, and gasoline were the largest contributors to inflation.

• InvenTrust Properties (IVT) - a newly listed shopping center REIT - began trading yesterday on the NYSE with a market capitalization of around $2B. IVT owns 65 retail properties, representing 10.8m square feet of retail space, primarily in the Sunbelt region.

Real Estate Daily Recap

U.S. equity rebounded Wednesday in another choppy session as investors shrugged-off hotter-than-expected inflation data as earnings season kicks off with most of the major banks reporting over the next 48 hour. Snapping a three-session losing streak, the S&P 500 gained 0.3% today while the Mid-Cap 400 finished higher by 0.4% and the Small-Cap 600 climbed 0.1%. Real estate equities among the leaders for the third-straight day as the Equity REIT Index gained 0.7% today with 17-of-19 property sectors in positive territory while Mortgage REITs climbed 0.3%.

The start of earnings season appears to have - at least temporarily - taken the focus off concerns over inflation and the outlook for Fed policy as the 10-Year Treasury Yield pulled back 3 basis points to 1.55% today despite inflation data showing the second fastest annual increase in consumer prices in 30 years. Nine of the eleven GICS equity sectors were higher on the day, led to the upside by the Utilities (XLU) and Materials (XLB) sectors. Residential REITs and homebuilders delivered another strong day, leading the Hoya Capital Housing Index and broader Real Estate (XLRE) sector to gains as inflation data has finally begun to reflect the recent surge in rents.

The BLS reported this morning that consumer prices continued to rise near the fastest annual rate in decades in September and reversed some of the moderation seen in the prior month. Consumer prices rose at a 5.38% year-over-year rate in September, which was the second-highest month for inflation in the past three decades and roughly a tenth-percent above consensus estimates. Core Consumer Prices - which excludes food and energy - rose 0.3% in August and 4.03% from last year - roughly in line with expectations - accelerating once again following a relative moderation in July and August. Prices for food, rent, and gasoline were the largest contributors to inflation.

We've discussed throughout the year how we see persistent near-term pressure on inflation metrics due to the delayed impact of soaring rents and home values, which are just beginning to show up in the data. The cost of rent soared 0.5% in September, which was the biggest increase in 20 years, but the annual gain remains significantly understated at just 3.2% - a rather confounding statistic at a time that rents and home prices are each rising at double-digit rates across essentially all other data series. The Dallas Fed published a report last month highlighting the apparent data issues at the BLS, finding a 16-month lag between the BLS inflation series and real-time market pricing of home prices and rents, and the Dallas Fed researchers expect housing inflation to add 0.6-1.2% to the Core CPI index in 2022 and 2023.

Equity REITs

Shopping Center: InvenTrust Properties (IVT) - a newly listed shopping center REIT - began trading yesterday on the NYSE with a market capitalization of around $2B. IVT is an owner and manager of 65 retail properties, representing 10.8 million square feet of retail space, primarily in the Sunbelt region. The company reports that 85% of NOI comes from grocery-anchored shopping centers - which have been exhibited more resilient fundamentals over the past decade - and 63% of NOI comes from smaller format shopping centers. IVT's portfolio was 92.9% leased as of the end of Q2 and had an average base rent per square foot of $19.31. Earlier this year, formerly non-traded REIT Phillips Edison & Company (PECO) went public in July, raising $476 million through an offering of 17M shares.

Mall: Sticking in the retail sector, Pennsylvania REIT (PEI) rallied more than 2.2% today after it reported strong metrics for traffic, sales and rent collections in September. Traffic through PREIT's core portfolio was at 94% of 2019 levels in September with five of its properties seeing traffic at-or-above 2019 levels. September also marked the highest current month for rent collection since the pandemic began at 92%. Despite the rebound across the mall sector this year, full-year FFO will remain 20-50% below pre-pandemic levels across the sector. Downward pressure on re-leasing rental rates suggests that it's still too soon to call the bottom.

Storage: Yesterday, we published Zero To Hero which analyzed recent developments in the self-storage sector and previewed third quarter earnings which will begin next week. Storage REITs stumbled into the pandemic with challenged fundamentals and an outlook for near-zero growth amid oversupply challenges. Catalyzed by the suburban housing boom, self-storage demand is suddenly insatiable. Like a phoenix rising from the ashes, storage REITs have continued their incredible turnaround this year. Consistent with trends across the housing sector, storage rents are soaring across the country. Despite the rally, valuations remain compelling as the sector's strong balance sheets, low cap-ex profile, and above-average external growth potential warrant a premium multiple relative to other REIT sectors.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mixed today as commercial mREITs gained 0.7% and are now higher by 1.7% this week. Residential mREITs slipped 0.1% but remain higher by 1.3% this week. Ellington Financial (EFC) slipped 3.9% after pricing a secondary offering for 5M shares of its common stock for proceeds of $91.3M. EFC also reported that its book value per share was between $18.31-$18.37 as of Sept. 30, up from its estimate of $18.30 on Aug. 31. The average residential mortgage REIT now pays a dividend yield of 8.45% while the average commercial mortgage REIT pays a dividend yield of 6.70%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.24% today, on average, and have produced total returns this year of roughly 15%. In the equity capital markets, Sabra Health Care (SBRA) was flat today after launching a secondary offering of 6.8M common shares for proceeds of $325M. Over in the bond markets today, Boston Properties (BXP) announced the redemption of 3.85% senior unsecured notes due Feb. 1, 2023, funded with the net proceeds from the offering in September 2021 of $850M of 2.45% senior unsecured notes due 2033.

Economic Data This Week

The busy slate of economic data continues with the Producer Price Index on Thursday, which is expected to show that producer costs rose nearly 9% for the month. Finally, on Friday, we'll see Retail Sales data for September which is expected to show a moderation in spending and we'll get the first look at October Consumer Sentiment data following a historic plunge last month.

To Continue Reading, Click Here To Visit Seeking Alpha!

Join our Mailing List on our Website

The REIT Forum is now the exclusive home to Hoya Capital premium research. Visit our website and join our email list for quick access to our real estate research library: HoyaCapital.com where we have links all of our real estate sector reports and daily recaps. You can also follow our real-time commentary on Twitter, LinkedIn, and Facebook.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.