• Alex Pettee, CFA

Homebuilders Rebound • REIT Earnings • Week Ahead

Summary

  • U.S. equity markets were mostly higher Monday ahead of a jam-packed week of corporate earnings reports and economic data as investors access headwinds from supply shortages and cost pressures.

  • Following gains of nearly 2% last week, the S&P 500 climbed another 0.3% today while the Mid-Cap 400 finished higher by 0.2% and the Small-Cap 600 slipped 0.1%.

  • Real estate equities - which gained nearly 4% last week - were mostly higher again today as the Equity REIT Index gained 0.2% with 11-of-19 property sectors in positive territory.

  • Homebuilder confidence jumped in October, rising 4 points to 80 as accelerating home buyer demand offset ongoing supply chain headwinds. All three of the index’s three components rose at least 3 points in October.

  • Small-cap CatchMark Timber (CTT) remained under pressure today after providing a business update last week in which it exited a troubled joint venture deal and cut its dividend - one of just 3 REITs that has lower its dividend this year.

Real Estate Daily Recap

U.S. equity markets were mostly higher Monday ahead of a jam-packed week of corporate earnings reports and economic data as investors access headwinds from supply shortages and cost pressures. Following gains of nearly 2% last week, the S&P 500 climbed another 0.3% today while the Mid-Cap 400 finished higher by 0.2% and the Small-Cap 600 slipped 0.1%. Real estate equities - which gained nearly 4% last week - were mostly higher again today as the Equity REIT Index gained 0.2% with 11-of-19 property sectors in positive territory while Mortgage REITs gained 0.3%.

As discussed in our Real Estate Weekly Outlook, markets are coming off their best week since July as a strong start to corporate earnings season and a solid slate of economic data temporarily eased investor jitters over potential stagflation The momentum continued today as seven of the eleven GICS equity sectors were higher, led to the upside but the Consumer Discretionary (XLY), Technology (XLK), and Communications (XLC) sectors. Homebuilders and the broader Hoya Capital Housing Index were among the leaders today following better-than-expected Homebuilder Sentiment data and ahead of a busy week of earnings reports and housing market data.

The NAHB reported today that homebuilder confidence jumped in October, rising 4 points to 80 as accelerating home buyer demand offset ongoing supply chain headwinds. All three of the index’s three components rose in October with current sales jumping 5 points to 87, sales expectations increasing 3 points to 84, and buyer traffic climbing 4 points to 65. Last Friday in Shortages Everywhere, we discussed how surging rents - and a desire for an inflation-hedging asset - have again sparked recent demand. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates and given recent signs of a late-year reacceleration in demand.

We have a jam-packed week of economic and housing data in the week ahead, continuing on Tuesday when we'll see Housing Starts and Building Permits data for September which is expected to show that construction activity accelerated modestly last month as supply chain constraints slowly ease at the margins. On Thursday, the National Association of Realtors releases Existing Home Sales data which is expected to show an acceleration back above the 6M annualized rate following a late-summer cooldown. We'll also be monitoring a flurry of Purchasing Managers Index ("PMI") data throughout the week.

Equity REITs & Homebuilders

As we'll analyze our Real Estate Earnings Preview report published tomorrow, real estate earnings season kicks off this week, and over the next month, we'll hear results from more than 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. The report will discuss the major themes and metrics we'll be watching across each of the real estate property sectors this earnings season in what will surely be another newsworthy and potentially volatile several weeks for the red-hot real estate sector. Highlights of this week's earning slate include Equity LifeStyle (ELS), Crown Castle (CCI), Rexford (REXR), First Industrial (FR), Alpine Income (PINE) and Safehold (NYSE:SAFE).

Timber: Small-cap CatchMark (CTT) - which plunged last week after providing a business update in which it noted it has exited its troubled Triple T joint venture and slashed its dividend - dipped another 7% today. CatchMark initially contributed $200m of the $1.39B total investment to begin the Triple T joint venture alongside other institutional investors in 2018. As part of the agreement, CTT collected fees representing roughly 10% of its revenues for managing 1.1 million acres of timberlands in Texas. An unprofitable business deal for CTT from early on, the $35m exit value was below what investors expected and it appears some are questioning the previous valuations of CTT's equity interest in the JV presented by the company. Weyerhauser (WY) and PotlatchDeltic (PCH) have been our preference in the Timber REIT space due to the vertical integration along the lumber supply chain.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly higher today as commercial mREITs gained 0.7% following gains of 2.0% last week. Residential mREITs gained 0.4% after climbing 0.7% last week. Sachem Capital (SACH) and NexPoint Real Estate (NREF) were among the leaders today while Hannon Armstrong (HASI) and ACRES Realty (ACR) lagged. The average residential mREIT now pays a dividend yield of 8.48% while the average commercial mREIT pays a dividend yield of 6.5%.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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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