Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Election Uncertainty | REITs Rebound | Earnings "Home Runs"

Daily Recap

  • U.S. equity markets finished mostly higher Friday as a continuation of better-than-expected economic data and solid corporate earnings results offset continued frustration over the stimulus stalemate.

  • Finishing lower by 0.4% this week, the S&P 500 clawed back 0.3% today while the tech-heavy Nasdaq 100 finished higher by 0.2% and the Dow Jones Industrial Average declined 28-points.

  • The broad-based Equity REIT ETF (VNQ) finished higher by 0.6% today with 15 of 18 property sectors in positive territory but still ended the week with declines of roughly 0.5%.

  • Election uncertainty has crept back into the markets as polls tightened before the final Presidential debate last night. Former VP Joe Biden's lead in the RCP Top Battleground Average has shrunk to 3.8 percentage points, exactly in-line with Hilliary Clinton's lead at this time in 2016.

  • Earnings Home Runs: Housing order growth surged a staggering 49% among the four homebuilders that reported earnings results this week. Redfin CEO commented that the "level of housing demand is absolutely insane."

Real Estate Daily Recap

U.S. equity markets finished mostly higher Friday as a continuation of better-than-expected economic data and solid corporate earnings results offset continued frustration over the stimulus stalemate. Finishing lower by 0.4% on the week, the S&P 500 ETF (SPY) clawed back 0.3% today while the tech-heavy Nasdaq 100 (QQQ) finished higher by 0.2% and the Dow Jones Industrial Average (DIA) declined 28 points. The broad-based Equity REIT ETF (VNQ) finished higher by 0.6% today with 15 of 18 property sectors in positive territory but still ended the week with declines of roughly 0.5% despite a generally strong slate of earnings. Meanwhile, the Mortgage REIT ETF (REM) jumped 1.8% on the day to end the week with gains of 0.9%. 

It was another choppy trading day as election uncertainty has crept back into the markets as polls tightened before the final Presidential debate last night. Heading into the final week before Election Day, former Vice President Joe Biden's lead in the RCP Top Battleground Average has shrunk to 3.8 percentage points, which is exactly in-line with Hilliary Clinton's lead at this time in 2016. 9 of the 11 GICS equity sectors finished higher today, but the Technology (XLK) sector was under-pressure following disappointing results from Intel (INTC). However, stellar results from homebuilders lifted the broader Hoya Capital Housing Index to strong gains as data this week showed that the housing industry continues to lead the economic recovery.

Homebuilders PulteGroup (PHM) and TRI Pointe (TPH) each reported earnings results yesterday while Meritage Homes (MTH) and NVR Inc (NVR) reported results earlier this week. Together, these four homebuilders reported a staggering surge in net order growth of 49% in the third quarter. The CEO of brokerage firm Redfin (RDFN) commented to CNBC that housing demand is "absolutely insane" and projected it will "last into 2021, at least." Earlier this week, we reported that sales of Existing Homes rose to the strongest sales pace in 14 years since December 2006.  The inventory of existing homes for sale dipped 19.2% from last year, representing a 2.7-month supply at the current sales pace, the lowest in the survey's history. 

Commercial Equity REITs

On Monday, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season has begun as more than 200 REITs and housing industry companies will report earnings over the next month, which we'll recap in our upcoming Real Estate Weekly Recap report. Rent collection - a metric that was rarely reported in the pre-COVID-19 era - has become the most critical statistic tracked by investors due to its impact on dividend-paying capacity. REITs enter third-quarter earnings season as the third-worst performing out of 11 GICS equity sectors, but improving rent collection and dividend commentary could be a positive catalyst to drive a recovery.

While REIT earnings were the focus of our Daily Recaps over the last few days, there was some other REIT-related newsflow. REITs don't get the love they deserve, according to a study published earlier this week by NAREIT conducted by CEM Benchmarking. The study found that over a 21-year period, publicly-listed REITs outperformed private real estate by almost 2.7 percentage points per year while offering superior risk-adjusted returns. Listed REITs posted the second-highest average annual net return at 10.2% and had the highest Sharpe ratio of .41. Additionally, over the measurement period, the study found that both listed equity REITs and unlisted real estate were not highly correlated to any other aggregate asset classes, an important feature for investors seeking investment diversification. 

This week, the NMHC's Rent Payment Tracker found 90.6% of apartment renters paid their rent by October 20th, which was a modest 1.8% below the pre-pandemic rate last October 20th. Today, the AP reported that Moody’s Analytics REIS' Q3 report found that the U.S. vacancy rate for apartments rose to 5% in the third quarter from 4.6% a year earlier. Their effective rent metric declined 1.8% as sharp declines in the "shutdown cities" - NYC, SF, LA - were offset by relative strength in the secondary and tertiary suburban markets, consistent with the "Urban Exodus" trend we discussed in our Apartment REIT report. Last week, we reported that while much has been written over the past four months about the potentially devastating effects on the rental markets from the July 31st expiration of several relief measures offered by the Cares Act in July, so far these dire forecasts have not come to fruition.

Yesterday, we published Storage REITs: Housing Boom Brightens Outlook. Storage REITs have been unexpected leaders throughout the pandemic, riding the tailwinds of the single-family housing boom. Storage REITs stumbled into 2020 with challenged fundamentals and a strained outlook after years of relentless supply growth, which led to intense competition between operators and downward pressure on rents. Contrary to early predictions, rent collection has remained essentially spotless throughout the pandemic, and dividends have also remained untouched as payments are essentially "collateralized" by a renter's possessions. After a sharp slowdown in leasing volumes during the "shutdown months," interim updates indicated that demand has rebounded sharply, helped by a red-hot housing market.

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 2.0% today to finish the week higher by 1.2%. Commercial mREITs gained 1.6% but still finished the week lower by 0.3%. Armour Residential (ARR) kicked off earnings season this week and next Monday, we'll hear results from KKR Real Estate (KREF), Apollo Commerical (ARI), New Residential (NRZ), and AGNC Investment (AGNC). We'll discuss this week's news and developments in our Real Estate Weekly Outlook report published tomorrow.

Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Hunt Companies (NYSE:HCFT) and Arbor Realty (ABR) are the lone mortgage REITs to raise dividends this year above pre-pandemic levels. Last month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished higher by 0.56% today, on average, but underperformed their respective common stock issues by an average of 0.78%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.58% higher in 2020 than their respective common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of “participating” preferred offerings that can be converted into common shares.

This Week's Economic Calendar We'll have a full recap of this week's busy slate of economic data in our Real Estate Weekly Outlook report published on Saturday morning. 

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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.

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