Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Final Debate | Dividend Boosts | Housing Gets Hotter

Daily Recap

  • U.S. equity markets finished higher Thursday ahead of the final Presidential debate tonight as economic data showed continued strength behind the robust recovery in the housing and employment markets.

  • Still lower by 0.8% on the week, the S&P 500 finished higher by 0.5% today while the Nasdaq 100 finished flat and the Dow Jones Industrial Average gained 153 points.

  • Despite 13 of 18 property sectors finishing in positive territory today, the broad-based Equity REIT ETF (VNQ) finished flat today following a busy 24 hours of REIT earnings reports.

  • Three more equity REITs - GTY, CCI, PINE - raised dividends over the last 24 hours. 34 equity REITs have now raised distributions in 2020 compared to 65 that have reduced or suspended their dividend.

  • Housing Gets Hotter: Existing Home Sales smashed estimates, climbing to 14-year highs in September. Record-low inventory levels sent home prices surging by nearly 15% from last year.

Real Estate Daily Recap

U.S. equity markets finished higher Thursday ahead of the final Presidential debate tonight as economic data showed continued strength behind the robust recovery in the housing and employment markets. Still lower by 0.8% on the week, the S&P 500 ETF (SPY) finished higher by 0.5% today while the tech-heavy Nasdaq 100 (QQQ) finished flat and the Dow Jones Industrial Average (DIA) gained 153 points. Despite 13 of 18 property sectors finishing in positive territory today, the broad-based Equity REIT ETF (VNQ) finished flat today following a busy 24 hours of REIT earnings reports while the Mortgage REIT ETF (REM) jumped 1.2% on the day.

Technology stocks were under pressure today after Twitter (TWTR) and Facebook (FB) now face Congressional subpoenas amid an escalating controversy over the censorship of a series of press reports critical of former Vice President Joe Biden. "Sector rotation" appeared to be the theme today as 8 of the 11 GICS equity sectors finished in the green today, led by the Energy (XLE), Financials (XLF), and Healthcare (XLY) sectors. Homebuilders were under pressure for the second-straight day despite more strong housing data this morning, but strength from real estate financials and residential REITs lifted the Hoya Capital Housing Index to gains. 

On that point, sales of Existing Homes rose another 9.4% in September from last month and are now higher by 20.9% from last year, according to data released today by the National Association of Realtors. At 6.54 million units sold on an annualized basis, this was the strongest sales pace in 14 years since December 2006. The inventory of existing homes dipped 19.2% from last year, representing a 2.7-month supply at the current sales pace, the lowest in the survey's history. As forecast at the beginning of the pandemic, home prices have actually reaccelerated amid this favorable supply/demand dynamic with prices jumping 14.8% from last year.

While the housing markets have continued their relentless upward trajectory, the employment recovery had been showing signs of slowing in recent weeks, but we saw very encouraging data this morning from the Department of Labor. Initial Jobless Claims ticked lower to 787k from last week's downwardly revised 842k, the lowest week of initial claims since the pandemic began. Continuing Claims decreased to 8.37 million, down another one million from last week. Since the peak in early May at 24.9 million, Continuing Claims have retreated by 16.5 million. The insured unemployment rate slid 0.7 percentage point to just 5.7%, the lowest insured unemployment rate since February.

Commercial Equity REITs Today, 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 since mid-summer, helped by a red-hot housing market.

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. 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.

Net Lease: Alpine Income (PINE) surged nearly 9% after it reported yesterday afternoon that it collected 100% of third-quarter rents and 100% of rents in October and also announced that it will increase its dividend by 10%, becoming the 32nd equity REIT to increase their dividend this year. Getty Realty (GTY) jumped more than 6% after it reported yesterday afternoon that the company collected 98% of contractual base rent, roughly consistent with their near-perfect collection rate throughout the pandemic. This morning, Getty also raised its dividends by 5%, the seventh net lease REIT to raise its dividend this year. Earlier this week, Agree Realty (ADC), which was the first net lease REIT to boost their dividend this year, reported that rent collection averaged 97% during the third quarter, including 99% in September.

Industrial: First Industrial (FR) gained 1.1% after reporting better-than-expected results and boosting FFO guidance, the third industrial REIT this week to raise full-year estimates. Citing "an increased level of leasing activity with e-commerce as a key driver as the economy continues its recovery," FR now sees FFO growth of 5.2% in 2020. Earlier in the week, Rexford Industrial (REXRreported a 23.8% rise in NOI growth and boosting full-year Core FFO and same-store NOI guidance. REXR now sees Core FFO rising 5.7% in 2020. Prologis (PLD) also boosted Core FFO guidance as PLD now sees 13.7% growth this year, likely be the highest among large-cap REITs. 

Cell Towers: Crown Castle (CCI) finished lower by 4.6% today despite boosting its dividend by 11%, joining fellow cell tower REIT American Tower (AMT) as two of the 34 equity REITs to raise dividends this year. CCI lowered its full-year outlook on revenue growth, EBITDA, and FFO per share, but provided a strong outlook for 2021, consistent with commentary over the last quarter suggesting that T-Mobile (TMUS) has been slow to "kick into gear" on their network rollouts following the merger with Sprint. For 2020, it now sees AFFO per share growth up 7.0% from last year, down slightly from its prior target of 7.6%. For 2021, CCI expects AFFO to rise 12%. 

Manufactured Housing: Sun Communities (SUI) declined by 2.0% today despite reporting better-than-expected results on the top and bottom line. MH and annual RV rent collections were approximately 97.0% and 98.0%, respectively. Same-community NOI jumped 5.5% while Core FFO jumped 9.5% from the same quarter last year. Earlier in the week, Equity Lifestyle (ELS) reported 1.8% growth in same-store NOI, up from 1.0% last quarter, driven by a 4.9% gain in same-store revenues, but offset by a 9.1% jump in same-store operating expenses. Combined, these REITs reported average SSNOI growth of 3.7%, up from 1.2% in Q2. Through nine months of 2020, these REITs reported Core FFO growth averaging 2.4%, one of the few sectors poised to report positive FFO growth this year. 

Office: Brandywine (BDN), a sunbelt-focused office REIT, gained 1.2% today after reporting that it collected 99.5% of total cash-based rents in Q3 and 97% of rents so far in October. SL Green (SLG), a New York City-focused office REIT, also gained 1.4% today after reporting that it collected 91.8% on Q3 rents and 90.3% of October rents. Despite reporting near-perfect rent collection throughout the pandemic, office REITs continue to be under pressure as the “work from home” paradigm threatens the long-term outlook. We believe that suburban and Sunbelt office assets are likely to see stronger demand over the next decade amid a broader "suburban revival."

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 1.4% today but remain lower by 0.8% on the week. Commercial mREITs gained 0.9% but remain lower by 1.8% this week. Armour Residential (ARR) finished higher by 3.4% after it reported that its book value per common share was $11.74 per share, an increase of 5.7% from its reported BVPS of $11.11 at the end of the second quarter. ARR had previously announced the completion of a strategic transition of its investment portfolio to solely agency-backed mortgage-backed securities.

Mortgage REIT earnings season kicks into high gear next week. 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 0.39% today, on average, but underperformed their respective common stock issues by an average of 1.26%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.80% 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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