• Alex Pettee, CFA

Fed Ahead • Mall Bankruptcy • REIT Dividend Boosts

Summary

  • U.S. equity markets remained near record-highs Monday ahead of a jam-packed week of economic data as investors will be keyed-in on comments regarding the recent surge in inflation from the Fed.

  • Closing at fresh record highs for the third straight day, the S&P 500 gained 0.2% but the Mid-Cap 400 declined by 0.9% and the Small-Cap 600 retreated 0.5%.

  • Real estate equities were among the leaders again today as the Equity REIT Index finished higher by 0.4% with 11-of-19 property sectors in positive territory while Mortgage REITs declined 0.3%.

  • Troubled mall REIT Washington Prime (WPG) plunged after announcing that it has filed for Chapter 11 bankruptcy, the third mall REIT in the past year to enter bankruptcy as COVID pushed several struggling retail REITs over the edge.

  • Speciality REIT Safehold (SAFE) became the 63rd equity REIT this year to raise its dividend so far in 2021. Of the REITs that have raised their payouts this year, 40 have come from companies that also raised dividends last year.

Real Estate Daily Recap

U.S. equity markets remained near record-highs Monday ahead of a jam-packed week of economic data as investors will be keyed-in on comments regarding the recent surge in inflation from the Federal Reserve. Closing at fresh record highs for the third straight day, the S&P 500 (SPY) finished higher by 0.2% today but the Mid-Cap 400 (MDY) finished lower by 0.9% and the Small-Cap 600 (SLY) declined by 0.5%. Real estate equities were among the leaders again today as the Equity REIT Index finished higher by 0.4% with 11 of 19 property sectors in positive territory while the Mortgage REIT Index declined by 0.3%.

The 10-Year Treasury Yield climbed by 4 basis points to close at 1.50% after recording its fourth-straight weeks of declines last week amid a seemingly insatiable bid for U.S. Treasury Bonds - a counterintuitive trend considering the recent surge in inflation which we discussed last week in Inflation Is Hotter Than It Looks. Eight of the eleven GICS equity sectors finished lower on the day, dragged on the downside by the Financials (XLF) and Materials (XLB) sectors. Homebuilders and the broader Hoya Capital Housing Index pulled-back today ahead ahead of a busy week of housing data which is expected to show mild cooling in the red-hot housing market.

We have a jam-packed week of economic and housing data in the week ahead. On Tuesday, we'll see Producer Price Index data for May which is expected to show the highest rate of producer inflation in several decades. We'll also see Retail Sales data for May while housing data also begins on Tuesday with the NAHB Homebuilder Sentiment Index for June. On Wednesday, we'll see Building Permits and Housing Starts data for May which is expected to show that new home construction activity remains near 15-year highs. Also on Wednesday, we'll hear commentary from the Federal Reserve, along with their interest rate decision at the conclusion of their two-day FOMC meeting.

Commercial Equity REITs

Malls: Washington Prime (WPG) plunged 30% after announcing that it has filed for Chapter 11 bankruptcy, the third mall REIT in the past year to enter bankruptcy along with CBL Properties (CBL) and Pennsylvania REIT (PEI). The restructuring plan will involve reducing its debt by $950M through converting its unsecured notes into equity and a $190M paydown of the mall REIT's revolving credit and term loan facilities and comes after nearly a dozen extensions to forbearance agreements with lenders over the past year as it struggled to make interest payments due to depressed levels of rent collection throughout the COVID pandemic. The restructuring plan calls for raising $325M through an equity offering and includes a four-year extension of its credit facility and will allow WPG to market its assets to determine whether any alternative transaction exist for greater recovery to shareholders.

Elsewhere, speciality REIT Safehold (SAFE) gained 1.7% after it became the 63rd equity REIT this year to raise its dividend so far in 2021, declaring a $0.17/share quarterly dividend, a 4.8% increase from its prior dividend of $0.1622. SAFE - which went public in 2017 and invests primarily in ground leases - was also one of 52 equity REITs that raised its dividend last year. Interestingly, of the 63 equity REITs that have raised their payouts this year, 40 have come from companies that also raised dividends last year - primarily in the "essential" property sectors including housing, industrial, and technology REITs.

Homebuilders: This afternoon, we'll publish an updated report on the single-family homebuilding sector and launch formal coverage of the sector on The REIT Forum. The scorching hot single-family housing market has cooled a bit in recent months as a record-low quantity of homes for sale and soaring home prices has prompted potential buyers to temporarily pause their home buying search. These would-be buyers are facing an increasingly tight rental market, however, as apartment and single-family rents are suddenly soaring by double-digit rates in early 2021 as rents "catch up" with home values. Growth at a reasonable price? Homebuilders continue to trade at single-digit P/E ratios despite a strong growth outlook over the next decade.


Office: Last week, we published Office REITs: No Going Back. Vaccines are here, masks are off, and sports stadiums are full. Office desks around the country remain eerily empty, however, as office utilization rates remain a fraction of pre-COVID levels. For many corporations, there's no going back - at least not to pre-COVID norms. Survey data revealed that office workers would accept pay cuts before returning to the 5-day in-person workweek. While the office isn't going away entirely, hybrid work environments - which require less office space - are increasingly standard. Commute times and cost-of-living factors are playing a major role in determining which markets recover faster.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.7% after ending last week higher by 4.3%. Commercial mREITs were higher by 0.7% today following gains of 4.2% last week. Colony Credit (CLNC) announced that it will rebrand to BrightSpire Capital and trade under the new ticker symbol, BRSP, effective June 24th as part of its management internalization following the split with Colony Capital (CLNY) earlier this year, which itself announced last week that it will rebrand as DigitalBridge on June 22nd.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.56% today, on average, but outperformed their respective common stock issues by an average of 0.51%. So far in 2021, REIT Preferred stocks are higher by 9.51% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.02% and trades at a slight premium to par value. Over in the bond markets, Apollo Commercial (ARI) commenced a private offering of $400M in senior secured notes due 2029 while Hannon Armstrong (HASI) announced a private offering of $750M in senior unsecured notes due 2026.

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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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