• Alex Pettee, CFA

Merger Monday • COVID Concerns • Jobs Week

Summary

  • U.S. equity markets were mixed Monday following their best week since February as pressure from concerns over COVID variants abroad were partially offset by a bid for large-cap technology stocks.

  • Following gains of nearly 3% last week, the S&P 500 finished higher by 0.2% today, but the Mid-Cap 400 declined by 1.0% and the Small-Cap 600 fell 1.1%.

  • Real estate equities were mostly-lower today - particularly the "reopening-sensitive" sectors - as the Equity REIT Index finished lower by 0.3% with 16 of 19 property sectors in negative territory.

  • The animal spirits are indeed alive in the REIT world. Healthcare REIT Ventas (VTR) will acquire Senior Investment (SNR) in a $2.3B deal as it seeks to double-down on the COVID-impacted senior housing sector.

  • The deal is the seventh major REIT-involved M&A deal since the start of April as premium valuations for publicly-listed real estate have reignited external growth across most REIT sectors.

Real Estate Daily Recap

U.S. equity markets were mixed Monday following their best week since February as pressure from concerns over COVID variants abroad were partially offset by a bid for large-cap technology stocks after Facebook (FB) won the dismissal of two antitrust cases. Following gains of nearly 3% last week, the S&P 500 finished higher by 0.2% today, but the Mid-Cap 400 declined by 1.0% and the Small-Cap 600 fell 1.1%. Real estate equities were mostly-lower today - particularly the "reopening-sensitive" sectors - as the Equity REIT Index finished lower by 0.3% with 16 of 19 property sectors in negative territory while the Mortgage REIT Index finished lower by 0.8%.

As discussed in our Real Estate Weekly Review, equity markets entered the week at record-highs despite concerns over the recent surge in inflation and the Fed's ability to control it. The 10-Year Treasury Yield retreated back below 1.50% today while Commodities (DJP) and Energy (XLE) sold-off after surging COVID cases sent Sydney, Australia back into a two-week lockdown and threatened to delay the U.K.'s long-awaited reopening. Five of the eleven GICS equity sectors were higher on the day, led to the upside by many of the "stay-at-home" winners including Communications (XLC) and Technology (XLK) while homebuilders led within the Hoya Capital Housing Index.

We have another busy slate of economic data in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 675k in June, an acceleration from the 559k rate of job growth in May while the unemployment rate is expected to tick down to 5.6%. We'll also see Case Shiller HPI Home Price Index data on Tuesday, Pending Home Sales data on Wednesday, and Construction Spending data on Thursday.

Commercial Equity REITs

Healthcare: The animal spirits are indeed alive in the REIT world. Ventas (VTR) announced this morning that it will acquire Senior Investment (SNR) in an all-stock deal worth $2.3B, including $1.5B of new senior debt. New Senior – the smallest healthcare REIT by market capitalization - owns 103 private pay senior living communities, including 102 independent living communities, totaling 12,404 units and located across 36 states in the United States. With the move, VTR is effectively "doubling down" on the beaten-down senior housing sector, as the deal lifted its total Senior Housing exposure to 48% from 44%. Within that 44%, Senior Housing Operating Portfolio (“SHOP”) rises from 26% to 31% while Triple Net Lease (“NNN”) ticks down from 18% to 17%.

This is a clear case, in our opinion, where the assets are worth considerably more when held within the Ventas portfolio than as a standalone entity. SNR’s highly-levered balance sheet was a major concern throughout the pandemic, underscored by the roughly 80% plunge in the stock between late February 2020 and early April 2020. VTR was perhaps a few quarters late on this transaction, but the valuation still appears fairly attractive, representing a roughly 6% capitalization rate based on SNR’s projected 2022 NOI and is expected to be approximately $0.09 to $0.11 accretive to Ventas’s normalized funds from operations per share on a full year basis.

This deal follows several portfolio acquisitions earlier his month from Medical Properties (MPW) and is the seventh major REIT-involved M&A deal since the start of April. In our quarterly State of the REIT Sector report last month, we projected that the REIT M&A wave would continue, fueled by premium valuations in the public markets. The deal is the fourth consolidation between two public equity REITs, joining shopping center REITs Kimco Realty (KIM) and Weingarten Realty (WRI), net lease REITs Realty Income (O) and VEREIT (VER), and industrial REITs Equity Commonwealth (EQC) and Monmouth (MNR).

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.8% today after ending last week with gains of 1.5%. Commercial mREITs declined by 1.1% today following gains of 3.9% last week. Last Friday afternoon, Arbor Realty (ABR) announced that it closed a multifamily mortgage loan securitization totaling approximately $450 million - the second for the Arbor Private Label multifamily mortgage loan securitization program. The Securitization is backed by a pool of 32 fixed rate mortgage loans secured by first priority mortgage liens on 50 multifamily properties.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.05% today, on average, but outperformed their respective common stock issues by an average of 1.04%. So far in 2021, REIT Preferred stocks are higher by 9.84% on a price return basis. The average REIT preferred currently pays a dividend yield of 5.96% and trades at a slight premium to par value.

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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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