• Alex Pettee, CFA

Merger Monday • Homebuilders Confident • REIT Dividend Boosts

Summary

  • U.S. equity markets finished mostly lower Monday as inflation concerns continue to weigh on sentiment while investors digested a mega-merger in the communications sector ahead of a busy week of housing data.

  • Extending its declines of 1.3% last week, the S&P 500 finished lower by 0.3% today while the Mid-Cap 400 was roughly flat. The tech-heavy Nasdaq 100 (QQQ) fell 0.6%.

  • Real estate equities were relative outperformers today following some M&A and dividend boosts as the Equity REIT Index gained 0.1% with 11 of 19 property sectors in positive territory.

  • REIT Dividend Boosts: Mortgage REIT iStar (STAR) boosted its dividend by 14% while office REIT Empire State Realty (ESRT) reinstated its dividend at a $0.035/share rate, roughly two-thirds below its pre-pandemic rate.

  • Digital Colony, a subsidiary of Colony Capital (CLNY), will acquire Landmark Infrastructure Partners (LMRK) in a $972 million deal as Colony accelerates its "digital transition" into technology real estate assets.

Real Estate Daily Recap

U.S. equity markets finished mostly lower Monday as inflation concerns continue to weigh on sentiment while investors digested a mega-merger in the communications sector ahead of a busy week of housing data. Extending its declines of 1.3% last week, the S&P 500 (SPY) finished lower by 0.3% today while the Mid-Cap 400 (MDY) was roughly flat and the Small-Cap 600 (SLY) gained 0.3%. The tech-heavy Nasdaq 100 (QQQ) fell 0.6%. Real estate equities were relative outperformers today following some M&A and dividend boosts as the Equity REIT Index gained 0.1% with 11 of 19 property sectors in positive territory while the Mortgage REIT Index gained 0.4%.

As discussed in our Real Estate Weekly Outlook, stocks are coming off a turbulent week after inflation data showed the sharpest year-over-year jump in consumer and producer prices in more than a decade. Eight of the eleven GICS equity sectors finished lower on the day with Technology (XLK) and Communications (XLC) lagging as AT&T (T) declined following news that it will spin-off its media assets in a combination with Discovery. Homebuilders and the broader Hoya Capital Housing Index were modestly lower today despite better-than-expected Homebuilder Sentiment data.

The red-hot housing industry - which has been a continued leader of the early economic recovery - showed signs of continued strength in the latest report this morning from the NAHB. The Homebuilder Sentiment Index - a leading indicator of housing activity - remained steady at 83 in May as homebuilders continue to sell homes as quickly as they can build them. The sub-index for Traffic of Prospective Buyers remained near its highest level on record, offsetting some pressure from concerns over rising costs and constraints on land and lumber. Lumber futures (LB1:COM) have finally started to show signs of moderating as additional sawmill capacity comes online to ease bottlenecks.

We have a jam-packed week of economic and housing data in the week ahead. On Tuesday, we'll see Building Permits and Housing Starts data for April. Housing Starts climbed to the highest rate in nearly 15 years last month. Then on Friday, we'll see Existing Home Sales for April which is expected to climb to a 6.1M annualized rate as the Spring housing season heats up. Last week, Redfin (RDFN) data showed continued robust demand for housing with the typical home selling after just 18 days on the market, the lowest on record. A record-high 45% of homes that went under contract had an accepted offer within one week of hitting the market and 49% of homes sold for above their list price, also a record high.

Commercial Equity REITs

Data Center: Digital Colony, a subsidiary of Colony Capital (CLNY), announced it will acquire Landmark Infrastructure Partners (LMRK) for $13.00/share in a transaction valuing LMRK at approximately $972 million. CLNC - which has undergone a "digital transformation" over the last year by selling its legacy portfolio of healthcare and office assets and investing in technology real estate assets - rallied more than 2% on the news while LMRK jumped about 7%. Last week in our Data Center REIT report, we discussed how we see M&A as a potential catalyst this year and expect these REITs - which have plentiful access to capital - to make major moves as the "animal spirts" come alive across the broader REIT sector.

Cell Tower: AT&T (T) struck a deal with Discovery to spin-off WarnerMedia and combine them with Discovery's assets into a standalone entity as the second-largest wireless carrier in the U.S. seeks to exit the media business and focus on building out their wireless infrastructure. AT&T would receive $43 billion in the all-stock transaction. Cell Tower REITs are the landlords to the four nationwide cellular network operators in the U.S.: AT&T (T), Verizon (VZ), T-Mobile (TMUS), and DISH Network (DISH). While this tenant base is highly concentrated, the tower ownership business is even more concentrated, in part because these companies divested many of their towers to redeploy capital into other business lines over the last decade. Cell Tower REITs own 50-80% of the 100-150k investment-grade cell towers in the United States.

Office: Empire State Realty Trust (ESRT) finished slightly higher after it reinstated its dividend at a $0.035/share rate, roughly a two-thirds lower than its pre-pandemic dividend rate of $0.105/share. In all, we've now seen dividend boosts from 54 equity REITs and 19 mortgage REITs which is already higher than the full-year total for 2020. Of this 54, however, 20 are still paying dividends below their pre-pandemic rate.

Last week, we published REIT Earnings Recap. Overshadowed by concerns about rising inflation, a frenzy of real estate earnings reports over the last month has provided critical information on the state of the real estate industry. Results were better than expected across most major property sectors with roughly 80% of the 170 equity REITs and 40 mortgage REITs in our coverage universe beating consensus FFO estimates. Positive surprises were primarily in the residential sectors where self-storage, manufactured housing, and sunbelt-focused single-family and multifamily REITs saw accelerating rent growth.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.8% today, bouncing back from declines of 1.4% last week. Commercial mREITs finished higher by 0.5% today after ending last week with 2.1% declines. iStar Inc. (STAR) finished flat today after it declared a $0.125/share quarterly dividend last Friday afternoon, a 13.6% increase from its prior dividend of $0.110.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.17% today, on average, and underperformed their respective common stock issues by an average of 1.26%. Invesco Mortgage (IVR) announced today that it intends to redeem all of its 7.75% Series A Preferred (IVR.PA) on June 16, 2021. In the bond markets, Innovative Industrial (IIPR) commenced a private placement of $200M aggregate principal amount of senior notes due 2026 with the proceeds used for acquisitions of additional cannabis properties.

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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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