Energy Crunch • Yields Climb • Tech REITs Slump
U.S. equity markets rebounded Tuesday following a tech-driven sell-off following solid manufacturing data this morning and hope for political compromise as investors look ahead to a busy slate of employment data.
Bouncing back from declines of 1.3% yesterday, the S&P 500 gained 1.0% today while the Mid-Cap 400 finished higher by 0.1% and the Small-Cap 600 gained 0.4%.
Real estate equities lagged today - dragged down by underperformance by large-cap technology REITs - as the Equity REIT Index finished lower by 0.8% with 16-of-19 property sectors in negative-territory.
Hotel REITs lagged today after business updates from Braemar and Ashford which showed that occupancy and RevPAR remain well below 2019-levels, impacted by the "fourth wave" of the pandemic.
Continuing the recent theme of underperformance from technology REITs, data center REITs dipped today following a handful of analyst downgrades, citing the supply chain headwinds on hyperscale demand.
Real Estate Daily Recap
U.S. equity markets rebounded Tuesday following a tech-driven sell-off following solid manufacturing data this morning and hope for political compromise as investors look ahead to a busy slate of employment data. Bouncing back from declines of 1.3% yesterday, the S&P 500 gained 1.0% today while the Mid-Cap 400 finished higher by 0.1% and the Small-Cap 600 gained 0.4%. The tech-heavy Nasdaq 100 gained 1.4% after flirting with "correction territory" yesterday. Real estate equities lagged today - dragged down by underperformance by large-cap technology REITs - as the Equity REIT Index finished lower by 0.8% with 16-of-19 property sectors in negative territory while Mortgage REITs climbed 0.5%.
Political uncertainty looms large as the outcome of three separate market-moving events remain in doubt - the debt ceiling extension, the infrastructure bill, and the $3.5T White House budget. Nine of the eleven GICS equity sectors were higher today, led to the upside by the Financials (XLF) sector as the 10-Year Treasury Yield bounced back above 1.50% to close back on the cusp three-month highs. The Energy (XLE) sector continues to lead the gains over the past month as Crude Oil and Gasoline prices flirt with the highest levels in a decade amid a global "energy crunch" resulting from global supply chain issues, recovering demand, and ongoing OPEC production curbs.
Manufactured Housing: Today 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.
Hotel: Braemar Hotels (BHR) lagged today after it reported portfolio occupancy of 56.4% in September and RevPAR of approximately $188, which was 20.8% lower than September 2019. The company expects to report that for the full Q3 period, its REVPar was 6.5% below Q3 of 2019. Ashford Hospitality (AHT) was also under pressure after reporting portfolio occupancy of 59.7% in September and RevPAR of approximately $94, which was 28.2% lower than September 2019. For Q3, AHT expects to report that its REVPar was 25.6% below 2019 levels. As discussed last week in Winters Coming, the "fourth wave" came at an inopportune time for the industry, which was relying on robust demand in the critical late-summer season and the return of business travel this Fall.
Data Centers: Continuing the recent theme of underperformance from technology REITs, data center REITs dipped today following a handful of analyst downgrades, citing the supply chain headwinds on hyperscale demand. Equinix (EQIX) dipped more than 3% while Digital Realty (DLR) was lower by 1.9%. In Go Big or Go Home, we discussed why Data Center REITs have lagged this year as fundamentals have been largely unaffected by the pandemic and subsequent reopening - for better and worse. Data Center REITs reported solid-but-unspectacular earnings results in Q2. Leasing activity was better than expected, but "same-store" renewal pricing remains soft amid stiff "hyperscale" competition.
Per our Mortgage REIT Tracker, mREITs held up rather well today as residential mREITs finished higher by 0.2% while commercial mREITs slipped 0.5%. Granite Point Mortgage (GPMT) was higher by 1.6% after providing a business update and announcing a settlement of warrants representing 4.55M shares in cash for total consideration of approximately $32.1 million, resulting in a BVPS drag of $0.60. Boosted by 24 dividend hikes across the sector this year, the average residential mREIT now pays a dividend yield of 9.1% while the average commercial mREIT pays a dividend yield of 7.0%.
REIT Preferreds & Capital Raising
Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.53% today, on average, but have produced total returns this year of roughly 15%. Yesterday afternoon, PS Business Parks (PSB) announced that it will redeem all of its 5.20% Series W Cumulative Preferred Stock (PSB.PW) on November 3, 2021. Today, Arbor Realty has priced a public offering of 7M shares of its 6.25% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25/share, for gross proceeds of $175M, which will list on the NYSE under symbol ABR PFR.
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.