Keepin' It Real  

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Lower For Longer • Mall Bankruptcy • Housing M&A

Summary

  • U.S. equity markets finished broadly higher Wednesday after Fed Chair Powell reiterated the central bank's accommodative support of financial markets and its low-interest-rate policy amid anxieties over rising inflation expectations.

  • Extending its week-to-date gains to about 1%, the S&P 500 finished higher by 0.3% today while Dow Jones Industrial Average rallied 189 points while the tech-heavy Nasdaq 100 gained 0.4%.

  • Real estate equities were mostly higher today - led by the COVID-sensitive property sectors - as the broad-based Equity REIT ETFs gained 0.1% today with 13-of-19 sectors in positive territory.

  • Homebuilder Lennar (LEN) surged more than 13% today after reporting better-than-expected earnings results and announcing a move into the red-hot single-family rental sector and a spinoff of its PropTech unit.

  • Washington Prime (WPG) plunged nearly 5% after reporting earnings results yesterday afternoon and confirming that the troubled mall REIT is indeed in restructuring talks and that there is "substantial doubt" about its ability to continue as a going concern.

Real Estate Daily Recap

U.S. equity markets finished broadly higher Wednesday after Fed Chair Powell reiterated the central bank's accommodative support of financial markets and its low-interest-rate policy amid anxieties over rising inflation expectations. Extending its week-to-date gains to just shy of 1%, the S&P 500 ETF (SPY) finished higher by 0.3% today while Dow Jones Industrial Average (DIA) rallied 189 points while the tech-heavy Nasdaq 100 (QQQ) gained 0.4%. Real estate equities were mostly higher today - led by the COVID-sensitive property sectors - as the broad-based Equity REIT ETFs (VNQ) finished higher by 0.1% today with 13-of-19 property sectors in positive territory while the Mortgage REIT ETFs (REM) gained by 1.4%.

After trending sideways for most of the trading day, equity markets turned decisively higher during the Federal Reserve press conference during which the Fed committed to keeping short-term rates near zero while also discussing the brightening economic growth outlook. Six of the eleven GICS equity sectors finished higher on the day, led to the upside by the economically-sensitive Consumer Discretionary (XLY), Industrials (XLI), and Materials (XLB) sectors. Homebuilders and the broader Hoya Capital Housing Index delivered another strong day as well after a slate of strong earnings results.

On that point, homebuilder Lennar (LEN) surged more than 13% today after reporting better-than-expected earnings results, consistent with the trends of outperformance among housing-related companies over the last nine months. Lennar also announced a spinoff of a unit that invests in PropTech as well as announcing a major move into the single-family rental space with the formation of the Upward America Venture which will acquire single family homes for rent in "high growth markets across the United States."

As discussed in our recent Single-Family Rental and Homebuilder sector reports, we view the build-to-rent market as a key and growing source of relatively steady housing demand that is less impacted by near-term economic conditions or mortgage rates and expect the synergistic relationship between SFR institutional operators and homebuilders to continue to strengthen. Also today, the U.S. Census Bureau reported Housing Starts and Building Permits which each showed signs of moderation in February due, in part, to unseasonably harsh weather in the Southeast last month.

Commercial Equity REITs

Earlier this week, we published REITs: This Time Was Different. REITs recorded a sequential improvement across all critical metrics in Q4, powering a historic wave of dividend growth in early 2021. That wave of growth continued over the last 24 hours with another dividend boost yesterday afternoon from net lease sector stalwart Realty Income (O), which boosted its dividend by 0.2%, becoming the 48th equity REIT to raise its payouts through the first eleven weeks of 2021. Combined with the 17 increases from the mortgage REIT sector, there have already been more increases in 2021 than all of 2020.


Malls: Washington Prime (WPG) plunged nearly 5% after reporting earnings results yesterday afternoon and confirming that the troubled mall REIT is indeed in restructuring talks and that there is "substantial doubt" about its ability to continue as a going concern. WPG reported another dismal quarter of results and ended 2020 with a full-year decline of FFO/share of -69.7%. Additionally, while the firm has not paid a common stock dividend since last March, WPG announced the suspension of its preferred stock dividends yesterday afternoon. We'll publish our quarterly update on the mall REIT sector later this afternoon on The REIT Forum.

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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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