• Alex Pettee, CFA

Debt Compromise • REITs Lead • Prison Break

Summary

  • U.S. equity markets rebounded Wednesday after Senate GOP leader McConnell offered a deal to extend the debt ceiling into December, potentially avoiding the risk of technical default on U.S. debt.

  • Rebounding from intra-day declines of nearly 1.5%, the S&P 500 ultimately ended the day higher by 0.4% while the Mid-Cap 400 finished lower by 0.2% and the Small-Cap 600 declined 0.8%.

  • Real estate equities were among the leaders today as the Equity REIT Index finished higher by 1.0% with 18-of-19 property sectors in positive territory while Mortgage REITs slipped 0.4%.

  • Prison operator GEO Group (GEO) was again among the leaders today after a federal appeals court on Tuesday tossed out California's ban on privately owned immigration detention facilities.

  • The busy slate of employment data started on a positive note as ADP reported this morning that its measure of private sector employment increased by 568k in September, above the estimates of 430k.

Real Estate Daily Recap

U.S. equity markets rebounded Wednesday after Senate GOP leader McConnell offered a deal to extend the debt ceiling into December, potentially avoiding the risk of technical default on U.S. sovereign debt. Rebounding from intra-day declines of nearly 1.5%, the S&P 500 ultimately ended the day higher by 0.4% while the Mid-Cap 400 finished lower by 0.2% and the Small-Cap 600 declined 0.8%. Real estate equities were among the leaders today as the Equity REIT Index finished higher by 1.0% with 18-of-19 property sectors in positive territory while Mortgage REITs slipped 0.4%.

The busy slate of employment data started on a positive note as ADP reported this morning that its measure of private sector employment increased by 568k in September, above the estimates of 430k. Economists are looking for job growth of 460k in Friday's closely-watched BLS nonfarm payrolls report. Eight of the eleven GICS equity sectors finished higher on the day with the yield-sensitive sectors leading the charge including Utilities (XLU) and Real Estate (XLRE) while the Energy (XLE) sector lagged as gasoline and oil prices pulled back from the highest levels in at least a half-decade.

Equity REITs

Prisons: GEO Group (GEO) was among the leaders today after a federal appeals court on Tuesday tossed out California's ban on privately owned immigration detention facilities. Judge Kenneth Lee wrote that the bill - which was signed by Gov. Gavin Newsom in 2019 - was unlawful because it "conflicts with the federal power and discretion given to the Secretary of Homeland Security in an area that remains in the exclusive realm of the federal government." GEO Group may not be a REIT for much longer, however, as it announced in April that it will "undertakes an evaluation of GEO's structure as a REIT." The board expects to conclude its evaluation in 4Q21. Last year, fellow prison operator CoreCivic (CXW) abandoned the REIT structure.

Healthcare: Yesterday, Ventas (VTR) announced that it will transition operations of 90 senior living communities from Eclipse Senior Living to a group of eight senior housing operators. The company says that the communities were not contributors to the Company’s overall NOI or its Senior Housing Operating Portfolio (“SHOP”) NOI in the second quarter 2021. Ventas expects to incur certain one-time transition costs and expenses in connection with the transitions. As we'll discuss in our updated Healthcare REIT report published this afternoon, healthcare REITs have slumped over the past quarter amid the "fourth wave" of the pandemic, which has slowed the recent recovery in senior housing fundamentals. The public-pay side of the sector - skilled nursing and hospital REITs - have been negatively impacted by the expectations of less fiscal stimulus and government support.

Manufactured Housing: Yesterday, we published A Rare Opportunity which analyzed recent performance from the perennially outperforming manufactured housing REIT sector. Despite reporting stellar results throughout the year, Manufactured Housing REITs' remarkable streak of eight straight years of outperformance over the REIT Index is suddenly in doubt entering the fourth quarter. Pressured by concerns over rising rates, inflation, and the broader rotation from growth into value, MH REITs have pulled back into "correction territory" for just the third time over the past decade. Beneficiaries of the intensifying housing shortage - creating a compelling backdrop for companies across the housing industry - the correction could be the long-awaited buying opportunity for these dividend growth champions.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mixed today as residential mREITs finished lower by 0.3% but remain higher by 0.4% this week. Commercial mREITs slipped 0.2% today to erase their weekly gains. On an otherwise slow day of news flow, AFC Gamma (AFCG) was among the leaders after pricing $100M of senior unsecured notes due 2027. Boosted by 24 dividend hikes across the sector this year, the average residential mREIT now pays a dividend yield of 9.04% while the average commercial mREIT pays a dividend yield of 6.83%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.09% today, on average, but have produced total returns this year of roughly 15%. Over in the bond markets, American Campus (ACC) priced $400M of 2.25% senior unsecured notes due 2029 while WP Carey (WPC) priced $350M of 2.45% senior notes due 2032 in the company's debut green bond offering.

Economic Data This Week

Employment data highlights the economic calendar in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 460k in September follow last month's disappointing employment growth of 235k. The expiration of federal supplemental unemployment benefits - and the return of in-person education for most school districts - are expected to help pull many sidelined workers back into the labor-force, but these effects may have been offset by a broader slowdown in economic activity due to the "fourth wave" of the pandemic.

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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.

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