Alex Pettee, CFA
Decision Day | REITs Rally | Earnings Recap
U.S. equity markets surged Tuesday as Americans headed to the polls while investors hope for clarity on the election results and the path for future fiscal stimulus and economic policy.
After gaining 1.2% yesterday, the S&P 500 jumped another 1.8% today and the Dow Jones Industrial Average jumped surged by 555-points following yesterday's 424-point rally.
Real estate equities delivered another strong day amid another busy 24-hours off earnings results as Equity REITs finished higher by 2.0% today with all 18 property sectors in positive territory.
Performance patterns suggest that the rally is likely attributable to increased odds of a "divided government" as domestic-focused and regulation-sensitive sectors have delivered notable outperformance.
For example, private Prison REITs - perhaps the most politically-sensitive stocks across the entire equity market - have surged nearly 14% this week. We recap and analyze another busy slate of REIT earnings reports over the last 24 hours.
Real Estate Daily Recap
U.S. equity markets surged on Election Day Tuesday as Americans headed to the polls while investors hope for clarity on the election results and the path for future fiscal stimulus and economic policy. After gaining 1.2% yesterday, the S&P 500 ETF (SPY) jumped another 1.8% today and the Dow Jones Industrial Average (DIA) jumped surged by 555-points following yesterday's 424-point rally. Real estate equities delivered another strong day amid another busy 24-hours off earnings results as the broad-based Equity REIT ETF (VNQ) finished higher by 2.0% today with all 18 property sectors in positive territory while the Mortgage REIT ETF (REM) finished higher by 1.3%.
While some publications have attributed the two-day rally to improving prospects of a "Blue Wave," the betting markets and sector-level performance trends call into question that narrative. These patterns suggest that the rally is likely more directly attributable to increasing odds of a "divided government" as the regulation-sensitive sectors have delivered notable outperformance over the last two days. Private prison REITs - perhaps the most politically-sensitive stocks across the entire equity market - have surged by 14% this week. Meanwhile, the technology (XLK) and communications (XLC) sectors have been notable laggards. Domestic-focused Small Caps (SLY) and Mid-Caps (MDY) led the way today while homebuilders and the broader Hoya Capital Housing Index added to their already strong gains on the week.
Election forecasters have been parsing various state-level reporting throughout the day including party identification data of votes cast in Florida, Arizona, and Nevada. Forecasters have also been monitoring live voting results from the territory of Guam, where roughly 80% of the Election Day votes have already been counted. After losing to Hillary Clinton by a margin of nearly 48% in 2016, President Trump trails former Vice President Biden by 13.4% among votes tallied thus far, representing a 34% swing towards President Trump since 2016. As of 4:30pm on Election Day, betting markets currently assign a roughly 65% implied probability of a Biden victory and an 85% probability of Democrat house control, and see Democrats as 60/40 favorites for the Senate.
Commercial Equity REITs Last week, we published our REIT Earnings Halftime Report: Dividend Cuts, No More. We're at the halfway-point of another newsworthy REIT earnings season. Results thus far have been better-than-expected as dividend cuts have given way to dividend boosts. After 63 equity REITs and 32 mortgage REITs cut dividends in Q2, just three REITs have announced a reduction since then while 39 REITs have raised dividends above pre-pandemic rates. Amid the pandemic, the "essential" property sectors - housing, technology, and e-commerce/industrial - have actually become stronger, perhaps at the expense of non-essential property sectors. We recap the notable earnings reports over the last 24 hours below.
Hotels REITs: Ryman Hospitality (RHP) jumped more than 3% today after it reported this morning that its occupancy rate in Q3 climbed to 14.6%, up from just 1.7% in Q2 (lowest in the REIT sector) but also noted that its monthly cash burn decreased as it has now reopened four of their five hotels. On average, hotel REITs have reported a roughly 17-percentage-point increase in occupancy from Q2 rates, a quarter in which occupancy rates averaged a record-low 32.5%. This is broadly consistent with STR data which has shown that national hotel occupancy has rebounded to 50% by late-October, a recovery that has held steady despite strong seasonal headwinds and renewed COVID concerns. TSA Checkpoint data, which correlates closely with hotel occupancy, shows that airline travel has continued to grind higher in recent weeks despite the seasonal acceleration in COVID-19 cases.
Net Lease: Realty Income (O) finished lower by 0.6% today after it reported yesterday afternoon that it collected 93% of rents in Q3 and in October and increased its 2020 acquisition guidance. Through nine months, its AFFO per share is higher by 3.7%. Spirit Realty (SRC) gained 1.2% today after it reported yesterday afternoon that it collected 90% of Q3 rents and 93% of October rents and also boosted its acquisition guidance. Through nine months, SRC's AFFO per share is lower by 14.7% from 2019.
Shopping Centers: Retail Properties of America (RPAI) gained 2.9% after it reported yesterday afternoon that it collected 84% of Q3 rents and 87% of October rents. Same-store NOI growth was lower by 12.4% from last year, an improvement from its Q2 rate of -22.2%. Acadia Realty (AKR) reported this afternoon that it collected 87% of Q3 rents but noted that its same-store NOI dipped by -21.4% in Q3, below its Q2 decline of -18.7%. We've now heard results from eight of the seventeen REITs in the sector. As expected, rent collection has rebounded to around 90% by the end of Q3. Same-store NOI growth - which declined by an average of nearly 18% in Q2, has become "less bad" but is still not pretty with average reported declines of 11.7% thus far.
Apartments: Investors Real Estate (IRET) gained roughly 1.5% today after it reported yesterday afternoon that it collected 98.8% of rents in Q3 and saw improving occupancy rates. The Midwest-focused REIT recorded same-store and leasing metrics that were roughly in-line with our estimates with modest growth in same-store revenues and a slight dip in NOI growth while rental rates were essentially flat. The "urban exodus" theme has been on full display this quarter as apartment REIT properties in the "shutdown cities" - NYC, L.A., Chicago, and San Francisco – have seen residents flee to lower-cost and safer suburban markets and more business-friendly Sunbelt metros.
Healthcare: Healthpeak (PEAK) gained about 1.5% today after it reported yesterday afternoon that same-store NOI growth rose 2.8% from last year, a sharp rebound from the 2.2% decline in Q2. PEAK saw NOI rise 3.3% in their medical office portfolio and 5.5% in their life science portfolio. The senior housing segment recorded a 6.3% decline, but this was a sharp improvement from the -21.2% decline last quarter. PEAK continues to diversify away from the senior housing sub-sector and is in various stages on the sales of more than $4B of senior housing properties. Community Healthcare (CHCT) and Healthcare Trust of America (HTA) report results this afternoon. (Check back for updates this evening)
Cell Towers: SBA Communications (SBAC) declined by 0.9% today despite rounding out cell tower REIT earnings season yesterday afternoon with strong results. CCI raised full-year guidance across the board as the REIT now sees AFFO per share growth of 10.7% this year, up from 7.7% in the prior guidance. Last week, American Tower (AMT), reported a better-than-expected third quarter, boosting guidance across the board with AFFO per share now expected to rise by 6.3% in 2020. Crown Castle (CCI) boosted its dividend by 11% but lowered its full-year outlook for revenue growth. We continue to see Apple's (AAPL) iPhone 12 launch as the true "arrival" of 5G, the much-anticipated next-generation mobile network.
Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 2.0% today and are now higher by 4.8% on the week. Commercial mREITs gained 2.1% today and are higher by 5.0% this week. Tremont Mortgage (TRMT) surged more than 17% after it reported strong results this morning, noting that it remains current on all interest payments and that it plans to declare a one-time cash distribution in December "in order to pay out sufficient taxable income to maintain our REIT tax status." iStar (STAR) gained roughly 2% today after it reported results in-line with estimates this morning with a rise in tangible book value per share of roughly 1%. Anworth Mortgage (ANH) reports after the close today.
Last week, we published our Mortgage REIT Earnings Preview. Mortgage REITs took center-stage during the early stages of the pandemic as financial market instability violently shook the mREIT sector to the core with mind-numbing declines of more than 70%. Buoyed by a suddenly red-hot U.S. housing market, residential mREITs have rallied back from the brink over the last two quarters and have nearly doubled in value from their lows. The 3 trends we're watching this earnings season: 1) Dividend resumptions, 2) Updated book values, and 3) Macroeconomic commentary.
REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished higher by 0.31% today, on average, but underperformed their respective common stock issues by an average of 2.03%. The preferred issues of hotel REITs were among the outperformers today including Braemar Hotels (BHR) and Pebblebrook Hotels (PEB). Among REITs that offer preferred shares, the performance of these securities has been an average of 19,85% higher in 2020 than their respective common shares.
This Week's Economic Calendar While it will surely take a backseat in the headlines to the U.S. elections on Tuesday, employment data highlights next week's busy economic calendar, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for employment gains of roughly 600k in September following last month's gain of 661k and for the unemployment rate to tick down to 7.6%. We'll also see Construction Spending data on Monday, the Federal Reserve interest rate decision and press conference on Thursday, and a flurry of PMI data throughout the week.
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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.