Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Housing Shortage | Dividend Hikes | REITs Rebound

Daily Recap

  • U.S. equity markets rebounded Tuesday following better-than-expected housing data and some potential clarity in the looming Supreme Court battle, counterbalancing continued coronavirus concerns.

  • Following declines of 1.2% yesterday, the S&P 500 gained 1.0% today while the tech-heavy Nasdaq 100 jumped by 1.9%. The Dow Jones Industrial Average gained 141 points.

  • Real estate equities also rebounded after a rough day with the broad-based Equity REIT ETF (VNQ) finishing higher by 1.1% today with 15 of 18 property sectors in positive territory.

  • Sales of Existing Homes rose another 2.5% in August from last month and rose by 10.5% from last year. The supply of existing homes dipped 19% from last year, driving a 11.4% surge in home prices last year.

  • After the bell today, we saw two more dividend hikes. Healthcare Trust of America (HTA) became the 29th equity REIT to raise its dividend in 2020 to levels above 2019 rates. Mortgage REIT Western Mortgage Capital (WMC) resumed its dividend at levels below pre-pandemic rates.

Real Estate Daily Recap

U.S. equity markets rebounded Tuesday following better-than-expected housing data and some potential clarity in the looming Supreme Court battle, counterbalancing continued coronavirus concerns. Following declines of 1.2% yesterday, the S&P 500 ETF (SPY) gained 1.0% today while the tech-heavy Nasdaq 100 (QQQ) jumped by 1.9%. Real estate equities also rebounded after a rough day with the broad-based Equity REIT ETF (VNQ) finishing higher by 1.1% today with 15 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM) gained 0.5% after slipping 3.2% yesterday. 

Choppiness in the equity markets over the past month, fueled by the reacceleration in the coronavirus outbreak in Europe and a continued stalemate in a renewed fiscal stimulus package, hasn't yet translated to the bond markets, which have been notably anchored. 8 of the 11 GICS equity sectors finished in positive territory on the day, led by the Consumer Discretionary (XLY), Communications (XLC), and Technology (XLC) sectors. Homebuilders and the broader Hoya Capital Housing Index rallied after better-than-expected Existing Home Sales data this morning which confirmed that the housing industry continues to lead the economic recovery. 

On that point, sales of Existing Homes rose another 2.5% in August from last month and rose by 10.5% from last year, according to data released today by the National Association of Realtors. At 6.0 million units sold on an annualized basis, this was the strongest sales pace in 14 years since December 2006. The dramatic rebound in housing market activity continues to be driven by the favorable tailwinds of historically low-interest rates and demographic-driven demand, tailwinds that have come amid a lingering and intensifying housing shortage. The supply of existing homes dipped 19% from last year, representing a 3.0-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 11.4% from last year.

First-time buyers rose to 33% of sales, up from 31% last August. Lawrence Yun, NAR’s chief economist commented that "Home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market," but noted that "housing demand is robust but supply is not, and this imbalance will inevitably harm affordability." Some supply is on the way, however, with the Census Bureau reported last week that single-family Housing Starts were 12.1% higher than last August while total Housing Starts were 2.8% higher than last year. Of note, the 1.021m rate in August was the third-strongest rate of single-family housing starts of the past fourteen years while the 1.036 million rate in single-family permits was the strongest since 2007. We'll see New Home Sales data on Thursday. 

Commercial Equity REITs

Today, we published Industrial REITs: Virus Exposes Frail Supply Chains. The "hub of e-commerce" and the hottest property sector of the last half-decade, Industrial REITs have been unfazed by the coronavirus-induced pain that has encumbered much of the REIT sector. The dramatic acceleration in e-commerce adoption has pulled forward the "retail apocalypse" trends as retailers divert more of their capital away from malls and into distribution supply chains. While much of the REIT sector was slashing dividends this year, nearly half of industrial REITs have raised dividends in 2020. Rent collection among industrial REITs has averaged more than 97% since April. With the pandemic exposing deficiencies in supply chains, we believe the logistics-boom is back in the early-innings.

We remain in the heart of dividend declaration season and expect to see at least a few more dividend increases this week. After the bell today, Healthcare Trust of America (HTA) declared a $0.32/share quarterly dividend, 1.6% increase from prior dividend of $0.315.We've now tracked 29 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates - primarily in the "essential" property sectors - technology, housing, and industrials, but net lease REITs have come on strong with five dividend hikes since the start of June. On the other side, 64 equity REITs have reduced or suspended their dividend in 2020.

We also heard several rent collection and business updates over the last 24 hours. Net lease REIT Store Capital (STOR) announced that it received 88% of rents in September and revised higher their collection rates for August and July to 87%, resulting in aggregate third quarter 2020 cash rent collections of 87%, compared to 73% reported for the second quarter. 

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished flat on the day and remain lower by 3.3% this week. Commercial mREITs gained 0.2% today but are still lower by 2.9% on the week. After the bell today, Western Mortgage Capital (WMC) announced that it is resuming its dividend with a quarterly payout of $0.05 per share, but still well below its pre-pandemic rate of $0.31 per share. The Company also provided an estimated GAAP book value per share of as of August 31, 2020 of $3.31, implying a roughly 40% discount to BV. Yesterday, Two Harbors (TWO) announced that it is maintaining its dividend at $0.14 per share, in-line with its (reduced) Q2 payout.

Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Last week, Hunt Companies (HCFT) became the second mortgage REIT to raise its dividend above pre-pandemic levels by declaring a $0.085 dividend, a 13% increase from its prior dividend of $0.075. HCFT joined Arbor Realty (ABR) as the only mREITs that have increased their dividend in 2020 to levels above 2019 payouts. 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 available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.37% today, on average, and outperformed their respective common stock issues by an average of 0.29%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.58% 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 have another busy slate of economic and housing data this week. Today, we saw Existing Home Sales for August, which topped estimates with an annualized rate of 6.0 million. Then on Thursday, we'll see New Home Sales for August. Last month, New Home Sales jumped 13.9% and the 901k seasonally-adjusted rate was the strongest sales rate since 2007. Also on Wednesday, we'll see the FHFA House Price Index, which has shown a reacceleration in home price appreciation. As usual, we'll also be watching the weekly MBA Mortgage data on Wednesday and Jobless Claims data on Thursday.

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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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