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  • Alex Pettee, CFA

Lower Forever | Dividend Season | Happy Homebuilders

Daily Recap

  • A renewed sell-off in large-cap technology stocks dragged U.S. equity markets lower Wednesday despite dovish comments from Federal Reserve Chair Powell and solid retail sales and strong housing data.

  • After gaining ground on Monday and Tuesday, the S&P 500 finished lower by 0.4% today while the tech-heavy Nasdaq 100 dipped 1.6% after a reported FTC anti-trust probe into Facebook.

  • Real estate equities outperformed again today. The broad-based Equity REIT ETF finished higher by 0.5% with 13-of-18 property sectors in positive territory, led by the shutdown-sensitive mall and student housing sectors.

  • Homebuilder Sentiment jumped to the strongest levels on record in September, driven by a surge in Home Buyer Traffic, which far exceeded previous record levels.

  • Perhaps a "close second" to the housing industry in the velocity and magnitude of its V-shaped rebound has been the retail industry, which has regained all of the lost ground during the pandemic.

Real Estate Daily Recap

A renewed sell-off in large-cap technology stocks dragged U.S. equity markets lower Wednesday despite dovish comments from Federal Reserve Chair Powell and solid retail sales and strong housing data. After gaining 2% through the first two trading days this week, the S&P 500 ETF (SPY) finished lower by 0.4% while the tech-heavy Nasdaq 100 (QQQ) dipped 1.6%. Real estate equities outperformed again today as the broad-based Equity REIT ETF (VNQ) finished higher by 0.5% with 13 of 18 property sectors in positive territory, led by the shutdown-sensitive mall and student housing sectors. The Mortgage REIT ETF (REM), meanwhile, gained 1.6% today.

Today's late-day sell-off came despite assurances from the Federal Reserve that it would keep interest rates near zero for at least three more years and continue to provide monetary support “until labor market conditions have reached maximum employment and inflation is on track to moderately exceed 2% for some time.” 5 of the 11 GICS equity sectors finished in positive territory today, led by a surge in Energy (XLE) sector Hurricane Sally, which hit Alabama this morning as a Category 2 storm, pressures oil supply levels. Homebuilders and the broader Hoya Capital Housing Index finished higher today following record-high homebuilder sentiment data and solid retail sales data in the housing-related categories.  

Helping to power the equity market rally over the last five months has been data showing a dramatic rebound in housing market activity, perhaps the most critical sector of the U.S. economy. Following a record plunge in April back to the lowest levels since 2011, Homebuilder Sentiment has now fully recovered all of the lost ground, climbing to new record-highs in September. All three subcomponents gained last month, Current Sales jumping to 88, Future Sales rising to 84, and Home Buyer Traffic rebounded to 73, far exceeding the highest level of record. The Mortgage Bankers Association, reported today that mortgage applications to purchase a single-family home are now higher by 6% from the same week last year, the 17th straight week of positive year-over-year growth following a sharp plunge in mortgage demand in March and April. 

As it relates to an emerging V-shaped recovery, perhaps a "close second" to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic. Aided by the WWII levels of fiscal stimulus over the last several months, retail sales jumped to all-time record highs on an annualized basis in August, climbing 0.6% from last month and 2.6% from the same month last year. Naturally, e-commerce sales have led the charge this year with online sales now higher by nearly 25% from last year while brick and mortar sales are now flat on from last year. While there may be enough "saved-up-stimulus" to keep sales rolling in September, the path forward for retail sales in months ahead becomes less certain if a fiscal stimulus agreement can't be reached.

Food services and drinking places (bars and restaurants) rebounded in August as more states and cities lifted lockdown measures, but this category remains lower by 15% from last August. Naturally, housing-related retail categories have seen a similar resurgence in recent months as the homebuilders themselves as the Building Materials category is second-only to e-commerce as the top-performing retail category with a 15.4% higher sales rate than last year. As we've discussed for several months, the building materials category - which includes Home Depot (HD) and Lowe's (LOW) - has been a notable positive standout during the pandemic, reflecting the continued resilience of the housing sector and the fact that households have exhibited a propensity to prioritize investments in home improvement amid the "work-from-home" era.

Commercial Equity REITs

Today, we published Data Center REITs: Sunlight Through COVID Clouds. A "cloudy" future lies ahead, but that's good news for data center REITs. The physical epicenter of the "cloud," data centers have been the best-performing property sector amid the pandemic. Clear winners of the work-from-home era, corporations will increasingly shift spending on physical office space towards "digital office space" through investments in remote-work infrastructure. Leasing activity - the most closely-watched earnings metric - surged in the second quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. While expensive, the "essential" property sectors - technology, housing, and industrial - are the lone areas of reliable growth within the REIT sector.

It was a slower day of REIT newsflow after a frenetic slate of news flow on Monday and Tuesday that saw several dividend increases and a dozen rent collection updates. On the dividend-front, we're in the heart of declaration season we've seen about a dozen dividend announcements over the last 24 hours. All equity REITs on the docket have maintained distributions at current levels including AvalonBay (AVB), Equity Residential (EQR), and Camden Properties (CPT), which had previously raised their distribution levels earlier this year. We've now tracked 28 equity REITs that have raised dividends in 2020 - primarily in the "essential" property sectors - technology, housing, and industrials - compared to the 64 equity REITs that have reduced or suspended their dividend.

We also heard a flurry of rent collection and business updates this morning and this afternoon. Industrial REIT PS Business Parks (PSB) announced that it collected 95% of August rents and 93% of July rents. Healthcare REIT National Health Investors (NHI) announced that it collected 96.6% of rents in September. Meanwhile, the National Multifamily Housing Council's Rent Tracker found that 86.2% of rents paid their rent by September 13, which was a modest 2.4 percentage points from the collection rate last year and roughly in-line with prior months, suggesting that the predict sharp drop in rent collection amid the "fiscal cliff" has not yet been borne out in the data.

Finally, we also heard a business update from Host Hotels & Resorts (HST), which announced that occupancy was 18.9% in August, which was actually a solid improvement from July's occupancy rate around 13% as the REIT's urban focus has proven to be a liability in the COVID era. By comparison, Apple Hospitality (APLE), which owns a more suburban-focused asset portfolio, announced yesterday that all 225 of its hotels are currently open and the company was "cash flow positive" in July with occupancy rising above 50% in the first week of September. Earlier in the week, Park Hotels & Resorts (PK) announced that it has reopened 14 hotels since June, increasing the total number of hotels open to 46 of 60 hotels (77%), or 59% of total room count. Occupancy improved to 32.3% for Park’s 33 open hotels during July and 38.8% during August. STR data has shown a steady improvement in national occupancy to roughly 50% in August and these improved levels have held in recent weeks despite seasonal headwinds.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs gained 2.3% today and pushed their week-to-date gains to 6.4%. Commercial mREITs finished higher by 1.0% today to push their weekly gains to 2.9%. Leading the way today were Granite Point (GPMT), New York Mortgage Trust (NYMT), and Ares Commerical (ACRE). Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

Once again, we saw a flurry of dividend announcements in the mREIT sector over the last 24 hours. Anworth Mortgage (ANH) and TPG Real Estate (TRTX) maintained dividends at current levels, which remained below their pre-pandemic level. On the other hand, Ares Commerical (ACRE), Blackstone Mortgage (BXMT), KKR Real Estate (KREF), and maintained payouts at current levels, which were in-line with pre-pandemic levels. Arbor Realty (ABR) remains the only mREIT that increased its dividend in 2020 to levels above 2019 payouts.

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 0.41% today, on average, but underperformed their respective common stock issues by an average of 0.99%.  Among REITs that offer preferred shares, the performance of these securities has been an average of 18.68% 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're in the middle of a busy week of economic and housing data. Today, we saw Homebuilder Sentiment for September, which surged to record-high levels. We also saw Retail Sales data for August, which maintained the V-shaped recovery as retail spending exceeded pre-pandemic levels again in August. On Thursday, we'll see Housing Starts and Building Permits for August. Housing Starts jumped 22.6% last month to a seasonally adjusted annual rate of 1.50 million units while Building Permits rose 18.8% to a rate of 1.50 million units. We'll also be watching Jobless Claims data on Thursday.

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iREIT on Alpha is the exclusive home to Hoya Capital premium research. Visit our website and join our email list for quick access to our real estate research library: where we have links all of our real estate sector reports and daily recaps. You can also follow our real-time commentary on Twitter, LinkedIn, and Facebook.

Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at 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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