Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Markets Plunge | European Lockdowns | Earnings Recap

  • U.S. equity markets finished sharply lower Wednesday as rising coronavirus case-counts prompted several European countries to reimpose lockdowns while technology stocks plunged amid an ongoing censorship controversy.

  • Now on the cusp of "correction territory," the S&P 500 declined by 3.5% today while the tech-heavy Nasdaq 100 finished lower by 3.7%. The Dow Jones Industrial Average dove 943-points.

  • Despite a solid slate of real estate earnings over the last 24-hours, the broad-based Equity REIT ETF (VNQ) declined by 2.4% today with all 18 property sectors finishing in negative territory.

  • We're in the midst of the busiest 24 hours of REIT earnings season. Results thus far have generally topped estimates with rent collection improving to pre-pandemic levels across most property sectors.

  • Homebuilder earnings and housing data this morning underscored that the U.S. housing industry continues to be a source of economic strength. Mortgage applications to purchase a single-family home rose again last week and are now higher by 24% from last year.

Real Estate Daily Recap

U.S. equity markets finished sharply lower Wednesday as rising coronavirus case-counts prompted several European countries to reimpose lockdowns while technology stocks plunged amid an ongoing censorship controversy. Now on the cusp of "correction territory," the S&P 500 ETF (SPY) declined by 3.5% today while the tech-heavy Nasdaq 100 (QQQ) finished lower by 3.7%. The Dow Jones Industrial Average (DIA) declined by 943 points. Despite a solid slate of real estate earnings reports over the last 24 hours, the broad-based Equity REIT ETF (VNQ) declined by 2.4% today with all 18 property sectors finishing in negative territory while the Mortgage REIT ETF (REM) declined by 2.3%.

All 11 GICS equity sectors finished lower on the day with Technology (XLK) and Energy (XLE) stocks dragging on the downside. Facebook (FB), Google (GOOG), Twitter (TWTR) each plunged more than 5% as the mega-cap technology companies were grilled by Senate Commerce Committee following the censorship of press reports critical of former Vice President Joe Biden from major news outlets. Homebuilders and the broader Hoya Capital Housing Index were relative outperformers today as homebuilder earnings and housing data this morning underscored that the U.S. housing industry continues to be a source of economic strength amid the ongoing uncertainty.

On the economic data front, the Mortgage Bankers Association reported that mortgage applications to purchase a single-family home rose again last week and are now higher by 24% from last year while refinancing applications are now higher by 80% from last year. The 30-Year Fixed Mortgage Rate with conforming loan balances stands at 3.00%, an all-time series low on the MBA index. Yesterday, we reported that home prices rose by the strongest rate in two years in the latest Case Shiller Home Price Index as record-setting demand for single-family housing clashes with record-low inventory levels.

On the earnings-front, M/I Homes (MHO) surged by 3.8% today after it reported this morning that net orders jumped by 71% in Q3 to an all-time quarterly record. Taylor Morrison (TMHC) also gained 1.3% today after it reported this morning that order growth surged 74% in Q3, the highest among the six homebuilders to report thus far. Century Communities (CCS) reports results after the bell today while MDC Holdings (MDC) will report tomorrow morning. The six homebuilders that have reported results this earnings season have recorded an incredible 57% surge in order growth. Last week, the CEO of brokerage firm Redfin (RDFN) commented to CNBC that housing demand is "absolutely insane" and projected it will "last into 2021, at least."

Commercial Equity REITs

Last week, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season kicks into high gear over the next three weeks as more than 200 REITs and housing industry companies will report earnings. Rent collection - a metric that was rarely reported in the pre-COVID-19 era - has become the most critical statistic tracked by investors due to its impact on dividend-paying capacity. REITs enter third-quarter earnings season as the third-worst performing out of 11 GICS equity sectors, but improving rent collection and dividend commentary could be a positive catalyst to drive a recovery. We recap the notable earnings reports over the last 24 hours below.

Apartments: Equity Residential (EQR) - which owns an urban-heavy portfolio in coastal markets - slid by 7.0% today after it reported an 8.4% decline in same-store NOI growth in Q3 as rental rates in their "Urban Core" markets plunged 14.7%. Apartment REITs in the "shutdown cities" - NYC, L.A., Chicago, and San Francisco – have seen residents flee to lower-cost and safer suburban markets and more business-friendly Sunbelt metros. This afternoon, we'll see results from AvalonBay (AVB), Essex (ESS), Independence (IRT), and Mid-America (MAA). (Check back this evening for updates)

Office: We've seen a clear urban vs. suburban effect at play in the office sector as well. Coastal urban-focused Boston Properties (BXP) declined by 3.5% today after reporting that Q3 same-property net operating income was down 13.1% from last year despite collecting 99% of total rent payments from office tenants. Sunbelt-focused Highwoods (HIW) declined by 4.7% today despite reporting yesterday afternoon that it collected 99.7% Q3 rents and 99.7% of October rents while same-store NOI growth was steady at 2.2%. Suburban and Sunbelt office assets are likely to see far stronger demand than urban markets over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival." Cousins (CUZ), Equity Commonwealth (EQC), Empire State Realty (ESRT), Kilroy (KRC), and Paramount (PGRE) report results after the close today.

Industrial: EastGroup Properties (EGP) finished essentially flat today after it reported strong results yesterday afternoon, boosting full-year guidance across the board- FFO growth, same-store NOI growth, and same-store occupancy. EGP now sees FFO growing 7.4% this year, up from its forecast of 6.0% provided last quarter. EGP also reported rent collection of roughly 99% in Q3. Last week, fellow industrial REITs Prologis (PLD), Rexford Industrial (REXR), and First Industrial (FR) all raised full-year FFO guidance as well. Industrial Logistics (ILPT) declined XX% today despite reporting this morning that it collected 98% of rents in Q3 and its occupancy rate held steady at 99%. Duke Realty (DRE) reports results after the close today. (Check back this evening for updates)

Shopping Centers: Kite Realty (KRG) and Weingarten (WRI) report results this afternoon. Earlier in the week, SITE Centers (SITC) reported this morning that rent collection improved to 90% in September and October. Q2 rent collection improved only to 70%, which is up only modestly from 64% as of their last report in July. Retail Opportunities (ROIC) reported that it collected 88.7% of total 3Q20 rent and commented that it expects its quarterly dividend to be reinstated in 1Q21. Same-store NOI declined by 3.5% decrease, an improvement from their Q2 decline of 9.3% Whitestone REIT (WSR) reported that 90% of Q3 rents and 90% of October rents were collected. WSR reported that same-store NOI declined 4.5% in Q3 compared to the 7.9% decline in Q2.

Net Lease: Four Corners (FCPT) declined by more than 3% today despite reporting after the close yesterday that it collected 99% of Q3 rents and 99% of rents in October. Its AFFO per share for Q3 was $0.37, representing a $0.02 per share increase compared to the same quarter in the prior year. Even more so than shopping centers, net lease REIT rent collection has improved sequentially and significantly from a low of 65% in April to 95% by September, as the vast majority of tenants have now reopened, prompting five net lease REITs to boost dividends. However, "experience-oriented" tenants, including movie theaters and gyms, remain significant soft spots. These REITs have continued to display a wide variance in rent collection success, so we'll be watching closely for signs of consistency.

Casinos: Gaming & Leisure Properties (GLPI) finished off by about 1.5% today after reporting yesterday afternoon that it collected 99% of rents to date and that all tenants other than Casino Queen - which is now paying rent - are current with their obligations. 45 out of their 46 properties have reopened with safety protocols and capacity constraints. Despite the pain felt across the travel and leisure industry, rent collection has been spotless since the start of the pandemic and dividends have been essentially untouched. Critically, casino REITs operate under a long-term, triple-net lease structure, leaving most of the financial and operational risk to their tenants. However, these long-term leases are only as safe as the tenants' ability to pay, some of which have been stretched to the brink. VICI Properties (OTC:VICI) reports results this afternoon.

Data Center: CyrusOne (CONE) and Equinix (EQIX) report results this afternoon. Earlier in the week, QTS Realty (QTSreported solid results as the company signed new and modified renewal leases of $26.0 million in Q3, which was one of the highest leasing quarters in QTS history. This compares with their $21 million in activity last quarter and $17 million in 3Q19. Leasing activity - the most closely watched earnings metric - surged in the prior quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. The pandemic appears to have accelerated enterprise investment in cloud computing technologies, as spending on the "virtual office" may replace spending on physical office space. 

Single-Family Rentals: Invitation Homes (INVH) reports results this afternoon and we'll be focused on leasing trends and rent collection. The suburbs are back. Amid the coronavirus pandemic, residential REITs - particularly the traditionally countercyclical single-family rentals - have proven to be a source of relative shelter for investors. Fueled by the maturing millennial generation, the 2020s were already poised to be a decade of "suburban revival", and behavioral changes in the post-coronavirus have been an added spark. Rent growth was far stronger than their apartment peers, with blended rent growth rising 3.2% year over year in Q2, while occupancy climbed to record-highs and turnover dipped to new lows. 

HealthcareWelltower (WELL) reports results this afternoon. Earlier in the week, Alexandria Real Estate (AREreported another strong quarter yesterday afternoon as the research/lab space segment remains the strongest healthcare sub-sector. ARE reported a 4.9% rise in same-store NOI in 3Q20 while leasing spreads jumped 30.9% in the quarter, pulling their YTD leasing spreads up to an impressive 21.5%. Earlier this month, the Wall Street Journal reported that Blackstone is looking at selling or taking public BioMed Realty Trust, the second-largest U.S. owner of life-science buildings with 93 properties, formerly a public REIT that Blackstone took private in 2016. ARE is currently the only pure-play research/lab space healthcare REIT.

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 2.1% today and are now off by 5.0% this week. Commercial mREITs declined by 2.9% today and are now lower by 5.1% this week. Dynex Capital (DX) gained more than 3% today after it reported that its Book  Value Per share is back above pre-pandemic levels, rising by 9.4% from last quarter. Combined with the dividend, the economic return was 11.7%, and DX provided a "favorable outlook for the balance of 2020 given the funding environment and central bank support." This afternoon, we'll see results from Annaly Capital (NLY) and Capstead Mortgage (CMO). (Check back this evening for updates)

Yesterday we published our Mortgage REIT Earnings Preview. Mortgage REITs took center-stage during the early stages of the pandemic as financial market instability violently shook the mREIT sector to the core with mind-numbing declines of more than 70%. Buoyed by a suddenly red-hot U.S. housing market, residential mREITs have rallied back from the brink over the last two quarters and have nearly doubled in value from their lows. Contrary to many forecasts, the pain across the housing sector and feared wave of foreclosures has not occurred. The 3 trends we're watching this earnings season: 1) Dividend resumptions, 2) Updated book values, and 3) Macroeconomic commentary on the mortgage and housing markets.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 1.46% today, on average, but outperformed their respective common stock issues by an average of 1.09%. Among REITs that offer preferred shares, the performance of these securities has been an average of 22.24% 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 Data

We have another jam-packed slate of economic and housing data this week. Earlier this week, we got the release of New Home Sales data for September and the release of the Case Shiller Home Price Index and the FHFA House Price Index for August. On Thursday, we'll get our first look at third-quarter Gross Domestic Product which is likely to show record-breaking economic growth last quarter, the final major economic data release before Election Day. We'll also be watching Personal Income and Spending data on Friday as well as PCE Inflation data.

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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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