• Alex Pettee, CFA

Fed Fallout • Yields Retreat • Builder Earnings

Summary

  • U.S. equity markets were mixed Thursday with interest rates and inflation expectations pulling back from yesterday's jump as financial markets continue to digest the Federal Reserve's updated policy outlook.

  • Declining for the third-straight day, the S&P 500 finished fractionally lower today while the Mid-Cap 400 declined 1.6% and the Small-Cap 600 dipped 1.7%.

  • Real estate equities were mixed today as the Equity REIT Index finished lower by 0.1% with 13-of-19 property sectors in negative territory while the Mortgage REIT Index dipped 1.5%.

  • Homebuilder Lennar (LEN) jumped more than 3.5% after reporting better-than-expected results yesterday afternoon. Margins were particularly impressive, driven by an 18% jump in home prices for new orders.

  • After jumping 7 basis points in the wake of the Fed's accelerated "lift-off" plans yesterday, the 10-Year Treasury Yield erased nearly the entire post-Fed gain following weaker-than-expected Initial Jobless Claims data this morning.

Real Estate Daily Recap

U.S. equity markets were mixed Thursday with interest rates and inflation expectations pulling back from yesterday's jump as financial markets continue to digest the Federal Reserve's updated policy outlook. Declining for the third-straight day, the S&P 500 (SPY) finished fractionally lower today while the Mid-Cap 400 (MDY) declined 1.6% and the Small-Cap 600 (SLY) dipped 1.7%. Real estate equities were mixed today as the Equity REIT Index finished lower by 0.1% with 13 of 19 property sectors in negative territory while the Mortgage REIT Index dipped 1.5%. The U.S. Dollar (USD) rallied while Gold (GLD) and Bitcoin (BTC-USD) declined on the day.

After jumping 7 basis points in the wake of the Fed's accelerated "lift-off" plans yesterday, the 10-Year Treasury Yield erased nearly the entire post-Fed gain following weaker-than-expected Initial Jobless Claims data this morning. Seven of the eleven GICS equity sectors finished higher today, led to the upside by the Technology (XLK), Healthcare (XLV), and Utilities (XLU) sectors. Homebuilders and the broader Hoya Capital Housing Index were mixed today as strong earnings results from homebuilder Lennar (LEN) were offset by pressure on homebuilding products suppliers and housing-related financials.

Homebuilder Lennar (LEN) jumped more than 3.5% after reporting better-than-expected results yesterday afternoon. Margins were particularly impressive, driven by an 18% jump in home prices for new orders. LEN maintained its full-year guidance for closings/deliveries but boosted its outlook for gross margins to 27.0% - 27.5% which, if achieved, would likely be the best in the sector and one of the strongest years for any homebuilder of all-time. Lennar noted that "Demand has continued to strengthen, while the supply of new and existing homes has remained constrained as new home construction cannot ramp quickly enough to fill the void of the production deficit that has persisted over the past decade."

Commercial Equity REITs

Data Center: CyrusOne (CONE) dipped more than 5% following their analyst day event in which the company noted that it expects rental rates on like-for-like leases to roll down by 18-22% from FY '21-'24. In our recent data center report, Tech Trouble, we noted that an ever-growing share of leasing activity is accruing to a shrinking quantity of increasingly powerful tenants including Amazon (AMZN), Google (GOOG), and Microsoft (MSFT). Data center pricing has become increasingly competitive and is likely to remain so for the foreseeable future. With muted pricing power, REITs must rely on development and M&A to fuel growth, and we think that CONE remains a potential acquisition target for either Digital Realty (DLR) or Equinix (EQIX).

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.3% but remain lower by 0.5% this week. Commercial mREITs were higher by 0.6% and are now higher by 0.3% this week. Two Harbors Investment (TWO) jumped more than 3% after news that it's joining the S&P SmallCap 600 index, effective prior to the open of trading on Tuesday, June 22. 12 other mortgage REITs are currently included in the S&P 600. Ellington Financial (EFC) finished lower by 2% after it announced its estimated book value per common share of $18.23 as of May 31, up slightly from its BVPS of $18.21 at the end of April.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.07% today, on average, and outperformed their respective common stock issues by an average of 1.27%. So far in 2021, REIT Preferred stocks are higher by 9.44% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.09% and trades at a slight premium to par value.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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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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