• Alex Pettee, CFA

Focus On Fed • Fixer Upper • COVID Concerns

Summary

  • U.S. equity markets declined for the second-straight day Wednesday despite a strong slate of retail earnings results as investors focused on commentary from the Federal Reserve and ongoing COVID struggles.

  • Pushing its week-to-date declines to 1.5%, the S&P 500 finished lower by 1.1% today while the Mid-Cap 400 declined by 0.9% and the Small-Cap 600 slipped 0.7%.

  • Real estate equities were mostly lower today despite strength from residential REITs as the Equity REIT Index was lower by 0.9% with 15 of 19 property sectors in negative territory.

  • Fixer Upper: Home improvement retailer Lowe's (LOW) rallied nearly 10% after reporting better-than-expected Q2 earnings results, noting that it saw total U.S. sales increase 21% against the 2019 level.

  • Housing Starts pulled-back more than expected in July, consistent with Homebuilders Sentiment data yesterday which indicated that builders continue to battle with supply chain delays and cost headwinds. Building permits, however, were better-than-expected.

Real Estate Daily Recap

U.S. equity markets declined for the second-straight day Wednesday despite a strong slate of retail earnings results as investors focused on commentary from the Federal Reserve and ongoing COVID struggles. Pushing its week-to-date declines to 1.5%, the S&P 500 finished lower by 1.1% today while the Mid-Cap 400 declined by 0.9% and the Small-Cap 600 slipped 0.7%. Real estate equities were mostly lower today despite strength from residential REITs as the Equity REIT Index was lower by 0.9% with 15 of 19 property sectors in negative territory while Mortgage REITs declined by 0.5%.

Minutes from the latest Federal Reserve meeting in late July showed that more committee members favored a tapering of monetary stimulus measures later this year, but were monitoring risks of rising COVID infections and looking for signs of emerging softness in economic data. Ten of the eleven GICS equity sectors were lower on the day, dragged to the downside by the Energy (XLE) sector - which is now off by nearly 5% this week - as commodity prices remain under pressure. Homebuilders and the broader Hoya Capital Housing Index were relative outperformers following strong earnings results and positive housing market commentary from Lowe's, offsetting a mixed report on housing starts and building permits.

Home improvement retailer Lowe's (LOW) rallied nearly 10% after reporting better-than-expected Q2 earnings results, noting that it saw total U.S. sales increase 21% against the 2019 level while reporting reported significant operating margin expansion. LOW commented that its outlook for the home improvement remains "very positive" citing higher household formation trends a a "longer-term spending share shift towards the home." These strong results followed mixed results yesterday from competitor Home Depot (HD) which missed consensus estimates on same-store sales but provided a similarly upbeat outlook for longer-term home improvement trends.

Lowe's also commented that "any near-term pressures on housing turnover is not related to an economic downturn as typical. In fact, there is more housing demand and supply resulting in home prices continuing to rise." On that point, fresh data from the Census Bureau today showed that Housing Starts pulled-back more than expected in July, consistent with Homebuilders Sentiment data yesterday which indicated that builders continue to battle with supply chain delays and cost headwinds. Building permits, however, were better-than-expected, consistent with a robust "backlog" of housing activity that should be unleashed as supply chain constraints finally begin to ease.

Equity REITs

Today, we published our State of the REIT Nation report which analyzed recently-released NAREIT T-Tracker data to review high-level REIT fundamentals over the past quarter through a series of charts. REIT company-level metrics have exhibited a substantial rebound over the last year as FFO and dividends per share have now fully recovered the sharp declines from early in the pandemic. From the prior year, FFO rose 20.8% in Q2 and nearly 100 REITs across have now boosted their dividends this year. Dividend payout ratios remain historically low, indicating embedded growth. REITs are no longer "cheap" but that's quite alright. Premium valuations have revived the "animal spirits" and sparked a much-needed wave of M&A and IPO activity and facilitated external growth.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.6% today and are now off by 1.6% this week. Commercial mREITs slipped 1.3% to push their declines to 2.3% on the week. On otherwise slow day of news flow, NexPoint Real Estate Finance (NREF) - which has been among the best-performing mREITs this year - was a laggard today after launching a secondary stock offering, seeking to raise roughly $40m to repay debt outstanding under the Company's master repurchase agreements and to make debt investments in the life sciences, self-storage, and multifamily sectors.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.22% today, on average, but outperformed their respective common stock issues by an average of 0.27%. So far in 2021, REIT Preferred stocks are higher by 8.62% on a price return basis. The average REIT preferred pays a current yield of 6.02% and trades at a slight premium to par value. Today, PennyMac Mortgage (PMT) priced a new 6.75% Series C Cumulative Redeemable Preferred Shares, which are expected to begin trading on the NYSE on August 24th.

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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