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  • Alex Pettee, CFA

Halftime Report • Home Sales Rebound • Yields Retreat

Summary

  • U.S. equity markets closed a historically strong first half with additional gains Wednesday following better-than-expected employment and housing data as investors await the BLS nonfarm payrolls report on Friday.

  • Ending the first-half of 2021 with gains of roughly 14%, the S&P 500 finished higher by 0.1% today while the Mid-Cap 400 was flat and the Small-Cap 600 gained 0.4%.

  • Real estate equities - which were among the best-performing industry groups in Q2 - were mostly lower today as the Equity REIT Index declined 0.5% with 13-of-19 property sectors lower.

  • Pending Home Sales jumped 8% in May from the prior month - better than the 1% drop expected by analysts - and reversing a recent trend of cooling sales over the prior quarter.

  • Pending Sales may be an early indication that easing inventory levels, retreating interests rates, and expectations of moderating home price appreciation set the stage for a strong second-half of 2021 for the broader housing industry.

Real Estate Daily Recap

U.S. equity markets closed a historically strong first half with additional gains Wednesday following better-than-expected employment and housing data as investors await the BLS nonfarm payrolls report on Friday. Ending the first-half of 2021 with gains of roughly 14%, the S&P 500 finished higher by 0.1% today while the Mid-Cap 400 was flat and the Small-Cap 600 gained 0.4%. Real estate equities - which were among the best-performing industry groups in Q2 - were mostly lower today as the Equity REIT Index finished off by 0.5% with 13 of 19 property sectors in negative territory while the Mortgage REIT Index finished higher by 0.2%.

Despite the stronger-than-expected economic data in the U.S., declining global bond yields amid ongoing COVID concerns over the Delta variant dragged the 10-Year Treasury Yield back on the cusp of the lowest-level since early March. Six of the eleven GICS equity sectors finished higher today, led to the upside by the Energy (XLE), Industrials (XLI), and Consumer Staples (XLP) sectors. Better-than-expected Pending Home Sales data helped to lift the Hoya Capital Housing Index to modest gains as well as timber REITs and other homebuilding products stocks were among the leaders today.

On that point, the NAR reported today that Pending Home Sales jumped 8% in May from the prior month - better than the 1% drop expected by analysts - and reversing a recent trend of cooling sales over the prior quarter. The level of Pending Sales in May - which is a forward-looking measure of housing market activity - were the highest for the month since 2005 and serve as an early indication that easing inventory levels, retreating interests rates, and gradually moderating home price appreciation set the stage for a strong second-half of 2021 for the broader housing industry.

Commercial Equity REITs

At the half-way point of 2021, Equity REITs are higher by 19.9% while Mortgage REITs have gained 16.5%. This compares with the 14.5% advance on the S&P 500 and the 16.9% gain on the S&P Mid-Cap 400. All nineteen REIT sectors are now in positive territory for the year, while on the residential side, seven of the eight sectors in the Hoya Capital Housing Index are higher. At 1.44%, the 10-year Treasury Yield has climbed 53 basis points since the start of the year and is 92 basis points above its all-time closing low of 0.52% last August, but 181 basis points below its 2018-peak of 3.25%.

Office: Easterly Government Properties (DEA) gained 1% after it boosted its full-year FFO guidance to $1.30-$1.32 from $1.28-$1.30. DEA - which was one of the few office REITs to record growth in 2020 - is set to lead the way again in 2021 when it comes to FFO growth. DEA also boosted its acquisition guidance to $300M from $200M previously, noting that it sees "the opportunity for accelerated growth with enhanced visibility and the outsized pace of accretive transactions."

Hotel: Yesterday, we published Time To Get Away? Fueled by vaccines and fiscal firepower, the United States has emerged as the clear global leader of the post-pandemic economic recovery, powering a robust recovery in domestic leisure travel. TSA data showed that domestic travel has recovered to 75% of pre-pandemic levels after bottoming at under 5%. STR reported that hotel occupancy has recovered to 90% of pre-pandemic levels. Hotel REITs are not out-of-the-woods, but we've become more bullish on the long-term outlook for domestic business travel. We see pockets of value in leisure-oriented hotel REITs focusing on Sunbelt markets.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.4% today but remain lower by 2.6% this week. Commercial mREITs declined by 0.4% today to push its weekly declines to 2.6%. New York Mortgage Trust (NYMT) gained 0.8% after it priced its 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. Starwood Property Trust (STWD) gained 0.4% after it priced $400 million of 3.625% unsecured senior notes due 2026.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.34% today, on average, and outperformed their respective common stock issues by an average of 0.36%. So far in 2021, REIT Preferred stocks are higher by 9.85% on a price return basis. The average REIT preferred currently pays a dividend yield of 5.95% and trades at a slight premium to par value.

Economic Data This Week

The economic calendar continues with Jobless Claims on Thursday, and 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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