• Alex Pettee, CFA

Debt Worries Ease • PropTech Deal • Jobs Day Ahead

Summary

  • U.S. equity markets were broadly higher Thursday on relief over an apparent agreement to raise the debt ceiling and on optimism that an outright global energy crisis can be avoided.

  • Extending the rally that begun mid-day Wednesday on reports of the debt compromise, the S&P 500 climbed 0.9% while the Mid-Cap 400 rose 1.5% and the Small-Cap 600 gained 1.6%.

  • Real estate equities were mostly-higher today - led by growth-sensitive sectors - as the Equity REIT Index gained 0.3% with 15-of-19 property sectors in positive territory.

  • Mortgage REIT Redwood Trust (RWT) - through its joint venture RWT Horizons - announced an investment in Flock Homes, a property technology firm, one of a handful of PropTech deals across the REIT sector this year.

  • Ahead of the closely-watched nonfarm payrolls report tomorrow, employment data thus far this week has been better-than-expected with ADP payrolls beating estimates yesterday and initial jobless claims falling more than expected this morning.

Real Estate Daily Recap

U.S. equity markets were broadly higher Thursday on relief over an apparent agreement to raise the debt ceiling and on optimism that an outright global energy crisis can be avoided through increased production in Europe and the release of strategic reserves in the U.S. Extending the rally that begun mid-day Wednesday on reports of the debt compromise, the S&P 500 gained 0.9% today while the Mid-Cap 400 finished higher by 1.5% and the Small-Cap 600 rallied 1.6%. Real estate equities were mostly-higher today - led by growth-sensitive sectors - as the Equity REIT Index gained 0.3% with 15-of-19 property sectors in positive territory while Mortgage REITs gained 0.2%.

Ahead of the closely-watched nonfarm payrolls report tomorrow, employment data thus far this week has been better-than-expected with ADP payrolls beating estimates yesterday and initial jobless claims falling more than expected this morning. Easing growth concerns sent the 10-Year Treasury Yield back above 1.55% today -again flirting with the highest levels since June. Ten of the eleven GICS equity sectors were higher today, but rising yields pressured yield-sensitive sectors including Utilities (XLU) and Real Estate (XLRE). A rebound in the homebuilding and home furnishing sectors led Hoya Capital Housing Index to gains today following data from Redfin (RDFN) that showed strong housing demand has continued into early October.

Equity REITs

Healthcare: Healthcare Trust of America (HTA) was among the leaders today after activist investor fund Elliott Investment Management was reported to be urging the REIT to put itself up for sale. Today, we published our updated Healthcare REIT report on The REIT Forum which discussed how "fourth wave" of the COVID pandemic has pressured Healthcare REITs over the past quarter, particularly in the senior housing and skilled nursing segments where the positive momentum has stalled. Staffing shortages have become critical issues at healthcare facilities - worsened by recent vaccine mandates - pressuring not only operating margins, but forcing some facilities to turn away new business. Medical office and lab space REITs have been less affected by these industry headwinds, but have been pressured by macro headwinds of rising rates. While near-term headwinds will persist until the pandemic abates, we remain optimistic on the long-term outlook for healthcare demand. Baby Boomers have accumulated $1.6 trillion in excess savings since 2019.

Prisons: GEO Group (GEO) pushed their weekly gains to more than 3% this week, commented today on yesterday's ruling by a federal appeals court on Tuesday which overturned California's ban on privately owned immigration detention facilities. GEO commented: “We are pleased with this ruling and anticipate it will allow the continuation of our California civil detention support services contracts for the U.S. Department of Homeland Security, which are effective through December 19, 2034.” 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.

Manufactured Housing: Earlier this week, 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 mostly higher today as residential mREITs gained 0.2% to push their weekly gains to 0.6%. Commercial mREITs gained 0.1% today but remain lower by 0.1% this week. Redwood (RWT) - through its joint venture RWT Horizons which invests in Property Technology firms - announced an investment in Flock Homes, an online real estate investment platform. Flock utilizes the 721 Exchange - similar to the 1031 exchange - which allows investors to exchange appreciated real estate property held for business or investment purposes for units in an operating partnership that will be converted into shares of a REIT. After the close today, AGNC Mortgage (AGNC), Ellington Financial (EFC), and Ellington Residential (EARN) each held their dividends steady with prior rates.



REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.04% today, on average, but have produced total returns this year of roughly 15%. Over in the bond markets, EPR Properties (EPR) closed on a new amended and restated $1.0 billion unsecured revolving credit facility. Elsewhere, net lease REIT STORE Capital (STOR) announced that S&P Global Ratings raised its outlook to positive from stable and affirmed its "BBB" issuer credit rating on the company.

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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