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  • Alex Pettee, CFA

Homebuilders Lead • Meme Stock Revival • Inflation Jitters Fade

Summary

  • U.S. equity markets finished mostly higher Wednesday amid of a busy stretch of corporate earnings results as concerns over inflation and rising interest rates have eased in recent days.

  • Pushing its week-to-date gains to roughly 1%, the S&P 500 finished higher by 0.2% today while the Mid-Cap 400 rallied 1.0% and the Small-Cap 600 jumped 1.9%.

  • Real estate equities extended their solid week-to-date gains as the Equity REIT Index gained 0.5% with 13 of 19 property sectors in positive territory.

  • The so-called "meme-stocks" - GameStop (GME) and AMC Entertainment (AMC) - are back in the limelight as retail traders look for new opportunities after the recent sell-off in cryptocurrencies.

  • Luxury homebuilder Toll Brothers jumped nearly 4% today after reporting better-than-expected earnings results with order growth surging 85% from last year and raising its full-year guidance across all of its key metrics.

Real Estate Daily Recap

U.S. equity markets finished mostly higher Wednesday amid of a busy stretch of corporate earnings results as concerns over inflation and rising interest rates have eased in recent days. Pushing its week-to-date gains to roughly 1%, the S&P 500 (SPY) finished higher by 0.2% today while the Mid-Cap 400 (MDY) rallied 1.0% and the Small-Cap 600 (SLY) jumped 1.9%. Real estate equities extended their solid week-to-date gains as the Equity REIT Index gained 0.5% with 13 of 19 property sectors in positive territory while the Mortgage REIT Index declined by 0.9%.

The so-called "meme-stocks" - GameStop (GME) and AMC Entertainment (AMC) - are back in the limelight as retail traders look for new opportunities after the recent sell-off in cryptocurrencies including Bitcoin (BTC-USD). Nine of the eleven GICS equity sectors were higher on the day while homebuilders and the broader Hoya Capital Housing Index were among the leaders after earnings results from Toll Brothers (TOL) showed continued robust demand for new homes and that builders have been able to more-than-offset construction cost increases with higher home prices.

On that note, luxury homebuilder Toll Brothers jumped nearly 4% today after reporting better-than-expected earnings results with order growth surging 85% from last year and raising its full-year guidance across all of its key metrics. TOL commented that "demand remains very strong" as it continues to raise prices and "strategically moderating sales paces." The homebuilder provided a strong outlook for the quarters ahead, noting that its "strong order growth coupled with significant and consistent price increases sets the stage for meaningful revenue, earnings margin, and ROE growth in fiscal year 2022."

Yesterday, the U.S. Census reported that despite the worsening housing shortage, new home construction in the United States moderated last month from historically-strong levels, confirming that some builders have been forced to delay incremental projects due to supply chain shortages. New Home Sales fell in April by nearly 6%, but this was still nearly 50% higher from last year. We've discussed in our Earnings Recap how homebuilders reported the largest backlog on record in Q1 and, due to constraints on materials and labor, simply cannot keep up with demand. The Monthly Supply of Houses in the United States declined to 4.4-months in April, which remains near historic-lows.

Commercial Equity REITs

Yesterday, we published our quarterly State of the REIT Sector. REITs recorded a sequential improvement across all critical metrics in Q1, powering a historic wave of dividend growth in early 2021. The Equity REIT Index has fully-recovered their pandemic declines on a total return basis, but several harder-hit property sectors are far from fully-recovered. REITs' strong balance sheets and access-to-capital prevented the type of shareholder dilution that resulted in a "lost decade" for REITs from the GFC. REITs are no longer "cheap," but that may be a good thing as premium valuations in the public markets have revived the "animal spirits" with a wave of M&A and private-to-public acquisitions in early 2021.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.9% today and are now higher by 0.5% this week. Commercial mREITs finished higher by 1.0% and are now higher by 0.3% on the week. Arbor Realty Trust (ABR) gained nearly 3% today after it today that it will issue a new Series D Preferred Stock and that it will redeem all of its 8.250% Series A Preferred (ABR.PA), all of its 7.75% Series B Preferred (ABR.PB), and all of its 8.50% Series C Preferred (ABR.PC) on June 24th. These securities were initially eligible to be called in 2018 and 2019.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.22% today, on average, but underperformed their respective common stock issues by an average of 1.07%. So far in 2021, REIT Preferred stocks are higher by 7.38% 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. Over in the bond markets, Invitation Homes (INVH) issued $300 million of notes at a weighted average coupon of 2.82% comprised of two tranches: a $150 million 7-year note at 2.46%, and a $150 million 15-year note at 3.18%.

Economic Data This Week

The busy week of economic and housing data continues tomorrow Pending Home Sales as well as Jobless Claims data. On Friday, we'll see the PCE Price Index, the Fed's preferred measure of inflation, as well as Personal Income and Spending data for April.

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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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