Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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Daily Recap

  • U.S. equity markets finished lower Thursday after Congress failed to reach a compromise on a potential coronavirus relief bill and as the "center of the pandemic" returns to Western Europe. Following gains of 2.0% yesterday, S&P 500 finished lower by 1.7% today while the Dow Jones Industrial Average dipped 406 points and the Nasdaq 100 declined 2.0%. After finishing higher by 1.0% yesterday, Equity REITs retreated by 1.3% today with 17 of 18 property sectors finishing in negative territory. Mortgage REITs declined by 1.0%. Today's declines came after a lukewarm Initial and Jobless Claims report following several weeks of encouraging data. Initial Jobless Claims held exactly steady last week at 884k, but Continuing Claims increased sightly to 13.39 million from 13.29 million. Simon Property (SPG) and Brookfield Property (BPY) have partnered on a $800m deal to save JC Penney from bankruptcy. Meanwhile, Brookfield Asset Management (BAM) is seeking a potential sale of its Simply Self Storage unit. Public Storage (PSA), ExtraSpace (EXR), and CubeSmart (CUBE) could be potential bidders.

U.S. equity markets finished lower for the fourth day in the past five Thursday after Congress failed to reach a compromise on a potential coronavirus relief bill and as the unfortunate claim of "center of the pandemic" returns to Europe amid a reacceleration in case counts in several countries. Following gains of 2.0% yesterday, S&P 500 ETF (SPY) finished lower by 1.7% today while the Dow Jones Industrial Average (DJI) dipped 406 points and the Nasdaq 100 (QQQ) declined 2.0%. After finishing higher by 1.0% yesterday, Equity REIT ETFs (VNQ) retreated by 1.3% today with 17 of 18 property sectors finishing in negative territory. The Mortgage REIT ETF (REM), meanwhile, lower by 1.0% after gaining 1.3% yesterday.

The "tech wreck" trading action that began last Thursday and dragged the major indexes into "correction territory" earlier this week may not be done quite yet. Reversing yesterday's sector performance, all 11 GICS equity sectors finished in negative territory today, dragged down by the Energy (XLE), Technology (XLK), and Utilities (XLU) sectors. Restoration Hardware (RH) led the Hoya Capital Housing Index to outperformance today after the home furnishings company reported a stronger than expected outlook, citing favorable trends relating to the strength of the U.S. housing market. On that point, the 30-year fixed-rate mortgage declined to record-lows at 2.86% last week in the Freddie Mac Mortgage Market Survey, which helped to power a 40% increase in home purchase mortgage applications from last year. 

Today's declines came after a lukewarm Initial and Jobless Claims report following several weeks of encouraging data. Initial Jobless Claims held exactly steady last week at 884k, but Continuing Claims increased sightly to 13.39 million from 13.29 million in the prior week. Since the peak in early May at around 25 million, however, Continuing Claims have retreated by 11.5 million. The Bureau of Labor Statistics reported that the U.S. economy added 1.37 million jobs in August - slightly better than economists' estimates for gains of 1.35 million. Most notably, however, the "headline" unemployment rate ticked down to 8.4% from 10.2% in the prior month as the separate BLS Household Survey - on which the unemployment rate is derived from - showed employment gains of 3.76 million jobs in August - the second largest month of job growth in the survey's history.

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  • Alex Pettee, CFA
  • "Give me yield or give me death." In a world of perpetually low interest rates, investors have piled into yield-oriented equity sectors to quench their voracious appetite for income.

  • High-yield real estate ETFs and CEFs have been popular options, which typically offer juicy dividend yields of 5-10% compared to their broad-based real estate ETF counterparts yielding below 4%.

  • On Wall Street, there’s no free lunch. High-yield funds REITs been slammed by the coronavirus pandemic, bearing the brunt of the wave of dividend cuts that has bedeviled the sector.

  • While roughly a third of the equity REIT sector cut or reduced dividends in 2020, many of these high-yield ETFs and CEF saw 60-85% of their constituents cut dividends this year.

  • These ETFs typically include a collection of misfits, outcasts, small-caps, and recent underachievers. CEFs add another dimension by utilizing leverage. Understanding the source of excess yield is essential.

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  • Alex Pettee, CFA
  • Net Lease REITs were punished by the coronavirus-related economic shutdowns, but have rebounded over the last several months as key shutdown-sensitive tenants reopen their doors and as rent collection improves.

  • Rent collection has improved sequentially from a low of 65% in April to 90% in July as the majority of tenants have now reopened. Theaters and gyms remain the soft spots.

  • Net Lease REITs had previously defied the 'retail apocalypse' headwinds over the past half-decade by investing in these experience-based retail categories, which have become liabilities in the coronavirus era.

  • Lackluster rent collection in the second quarter led to record-declines in operating metrics and forced four of the fifteen net lease REITs to reduce or eliminate their dividend since the start of the pandemic.

  • While several "experience-heavy" REITs continue to have their backs against the walls, the sector as a whole remains on a relatively firm footing as four net lease REITs have actually increased their dividend in 2020.

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