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  • Alex Pettee, CFA

Energy Inflation • Apartment Prices Jump • Fresh Records

Summary

  • U.S. equity markets gained for the sixth-straight day Thursday following better-than-expected jobless claims and U.S. manufacturing data ahead of the closely-watched BLS nonfarm payrolls report tomorrow morning.

  • Climbing to fresh record-highs, the S&P 500 finished higher by 0.6% today while the Mid-Cap 400 rallied 0.9% and the Small-Cap 600 gained 0.7%.

  • Real estate equities were mostly-higher today - led by residential and retail REITs - as the Equity REIT Index gained 0.4% with 13 of 19 property sectors in positive territory.

  • U.S. property price growth accelerated in May, according to Real Capital Analytics data, led by rising prices for apartment properties. Apartment prices rose 10.1% year-over-year in May, outpacing the 9.5% rise from industrial properties.

  • The majority of hotel properties are now operating at "break-even" levels according to STR data, as gross operating profit for U.S. hotels reached 70% of the comparable 2019 level. Urban hotels continue to lag hotels in "reopened" states across the Sunbelt.

Real Estate Daily Recap

U.S. equity markets gained for the sixth-straight day Thursday following better-than-expected jobless claims and U.S. manufacturing data ahead of the closely-watched BLS nonfarm payrolls report tomorrow morning. Climbing to fresh record-highs, the S&P 500 finished higher by 0.6% today while the Mid-Cap 400 rallied 0.9% and the Small-Cap 600 gained 0.7%. Real estate equities were mostly-higher today - led by residential and retail REITs - as the Equity REIT Index gained 0.4% with 13 of 19 property sectors in positive territory while the Mortgage REIT Index finished higher by 0.5%.

Ten of the eleven GICS equity sectors were higher on the day, led to the upside by the Energy (XLE) sector as oil prices jumped to their highest level since 2018 on reports that OPEC reached a tentative deal to gradually hike oil production. The 10-Year Treasury Yield, meanwhile, climbed 4 basis points after Initial Jobless Claims retreated to a pandemic-era low. Homebuilders led the Hoya Capital Housing Index to gains on further signs that the lumber shortage and other supply chain constraints are gradually easing and on data showing that mortgage rates retreated back below 3.0% last week.

Commercial Equity REITs

Apartment: Data from Real Capital Analytics indicated that U.S. property price growth accelerated in May, led by rising prices for apartment properties. The US National All-Property Index grew 0.8% in May from the prior month 8.9% from a year ago. Apartment sector prices were the fastest growing in May at 10.1% year-over-year, overtaking industrial at 9.5%. Office price growth came in at 2.9% and the retail sector turned in a 2.3% annual gain. Within the office segment, suburban office properties rose 4.5% year-over-year increase. while urban CBD office properties declined 5.5%.

Hotel: Data provider STR reported today that gross operating profit for U.S. hotels reached 70% of the comparable 2019 level, according its May 2021 monthly P&L data release. While demand, revenues and Gross Operating Profits ("GOP") continue to uptick, labor spending remained flat from the previous month at 64%. According to STR, 95% of hotels broke even on a GOP basis, while 73% broke even on a net income basis. For context, those percentages were 98% and 85% in May 2019. "Reopened" cities have seen the swiftest demand recovery with Tampa and Miami leading the way with occupancy rates and Revenue Per Available Room ("RevPAR") now above pre-pandemic levels while the coastal "shutdown cities" - New York, Boston, and San Francisco - continue to see depressed hotel occupancy rates.

Net Lease: Realty Income (O) was higher today after pricing an upsized secondary common stock offering of 8M shares, collecting gross proceeds of roughly $520M. Realty Income expects the proceeds to be used to fund further acquisitions and to pay down some borrowings. Acquisition-fueled growth - the "bread and butter" of the net lease sector - has kicked back into gear over the last two quarters, underscored by Realty Income's massive acquisition of VEREIT (VER). Earnings results and commentary were refreshingly "normal" as these REITs are again on the offensive. Net lease REITs - which are 7% of the Real Estate Index - accounted for 35% of total REIT net acquisitions.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.6% today but remain lower by 2.2% this week. Commercial mREITs gained 0.7% today and are now lower by 1.9% this week. New York Mortgage Trust (NYMT) announced that it intends to redeem all of its 7.875% Series C Cumulative Redeemable Preferred Stock (NYMTO) on July 30, 2021. Earlier this week, NYMT priced a new 6.875% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock which will begin trading on Nasdaq in several weeks under ticker symbol “NYMTL.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished flat today, on average, but underperformed their respective common stock issues by an average of 0.47%. So far in 2021, REIT Preferred stocks are higher by 9.71% on a price return basis. The average REIT preferred currently pays a dividend yield of 5.96% and trades at a slight premium to par value. Over in the bond markets, American Homes 4 Rent (AMH) priced $450M of 2.375% Senior Notes due 2031 and $300M of 3.375% Senior Notes due 2051. Elsewhere, DigitalBridge Group (BRG) priced an offering of $300M of 3.95% secured fund fee revenue notes.

Economic Data This Week

The economic calendar concludes on Friday with the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 675k in June, an acceleration from the 559k rate of job growth in May while the unemployment rate is expected to tick down to 5.6%.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

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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