Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

President Recovers | Stocks Rally | Uncertainty Ahead

Daily Recap

  • U.S. equity markets rallied Monday after President Trump announced he will return to the White House to continue his recovery from COVID-19, a recovery that was reportedly uncertain at times this weekend.

  • Building on gains of 1.6% last week, the S&P 500 finished higher by 1.8% today while the tech-heavy Nasdaq 100 jumped 2.2% and the Dow Jones  Industrial Average rallied 466-points.

  • After ending last week higher by more than 5%, the broad-based Equity REIT ETF (VNQ) finished higher by 0.5% today with 13 of 18 property sectors in positive territory.

  • After leading the gains last week, net lease REITs lagged today on news that more than 500 movie theaters controlled by U.K-based Regal Entertainment Group will temporarily suspend operations.

  • Following a strong slate of economic data last week, ISM data this morning showed a continued recovery in the services sector, rising to the highest level since the start of the pandemic. We preview this week's economic calendar.

Real Estate Daily Recap

U.S. equity markets rallied Monday after President Trump announced he will return to the White House to continue his recovery from COVID-19, a recovery that was reportedly uncertain at times over the past 72 hours. Building on gains of 1.6% last week, the S&P 500 ETF (SPY) finished higher by 1.8% today while the tech-heavy Nasdaq 100 (QQQ) jumped 2.2% and the Dow Jones Industrial Average (DIA) rallied 466 points. After ending last week higher by more than 5%, the broad-based Equity REIT ETF (VNQ) finished higher by 0.6% today with 13 of 18 property sectors in positive territory. Mortgage REITs (REM) gained 0.6% after ending last week with 4% gains.

As discussed in our Real Estate Weekly Outlook, equity markets snapped a four-week losing streak last week on a frenetic week of economic data and political developments. The developments over the weekend overshadowed a generally strong slate of economic data last week, which continued this morning as ISM data this morning showed a continued recovery in the services sectors, rising to 57.8 last month the highest since the start of the pandemic. All 11 GICS equity sectors were higher on the day, led by the Energy (XLE), Technology (XLK), and Healthcare (XLK) sectors. Commercial REITs (XLRE), along with homebuilders and the Hoya Capital Housing Index generally underperformed today after leading the gains last week on another very strong slate of U.S. housing market data. 

The economic calendar slows down in the week ahead after a frenetic slate of employment and housing data over the last two weeks. This morning, we saw a flurry of PMI data which showed a continued rebound in services activity in September. On Tuesday, we'll see JOLTs Job Openings data, a detailed (but backward-looking) breakdown of employment trends in August. As usual, we'll also be watching the weekly MBA Weekly Mortgage Applications data on Wednesday and Jobless Claims data on Thursday.

Commercial Equity REITs

REITs are coming-off delivered their best week since early July, which was led last week by the "shutdown sensitive" sectors including retail, student housing, and hotel REITs. After leading the gains last week, net lease REITs lagged today on news that more than 500 movie theaters controlled by U.K-based Regal Entertainment Group will temporarily suspend operations, citing the "lack of product" amid the postponement of many blockbuster films. AMC Entertainment (NYSE:AMC), the largest theater chain, dipped more than 10% on the news. We discussed the net lease sector's exposure to movie theaters in Net Lease REITs: Reopening Revival

Today, we published our quarterly analysis on Manufactured Housing REITs on the iREIT on Alpha marketplace, which we will publish on Seeking Alpha later this week. Manufactured housing REITs ("MH REITs") have proven to be relatively immune from coronavirus-related headwinds that have slammed much of the real estate sector, collecting nearly 100% of rents while also boosting dividends this year. Amid this housing shortage, MH REITs have begun investing in a new - but fundamentally similar - asset class: boat marinas. After a sharp slowdown in late-Spring, recreational vehicle and boat sales have smashed records this summer while the U.S. housing market has roared back to life. MH REITs aren't cheap, but long-term fundamentals remain stellar for this "essential" property sector.

We also heard a handful of business updates from REITs over the last 24 hours. Mall REIT Macerich (MAC) announced that all of its 47 U.S. properties are set to be back in business ahead of the start of the holiday season after L.A. County gave the green light for mall re-openings, effective October 7. Postal Realty Trust (PSTL) announced that it received 100% of its Q3 rents and acquired 123 USPS properties for $26.8M. As of October 5, 2020, the company’s portfolio is 100% occupied comprised of 692 postal properties across 47 states. Diversified REIT Washington REIT (WREcollected ~99% in August, 97% of office rents, and 95% of retail rents. 

Last week, we published Hotel REITs: Winter Is Coming. Hotel ownership is a tough, capital-intensive business even in the best of times, and hotel REITs tend to be "overweight" in the most affected segment of the lodging industry: corporate travel, group bookings, and international tourism. Demand from these segments is closely correlated with domestic air travel, which has exhibited a slow recovery from its lows in April according to TSA Checkpoint data. Airline travel bottomed in early April at just 4% of its prior-year levels but has rebounded to roughly 35% of "normal" by late September. Following a record year for the industry in 2019, hotels REITs reported occupancy rates below 20% in Q2, but occupancy has recovered to roughly 45% by early September according to recent reports.

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 0.4% today after ending last week higher by 1.2%. Commercial mREITs gained 0.2% today after finishing last week higher by 5.0%. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Last month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

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 0.35% today, on average, and outperformed their respective common stock issues by an average of 0.47%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.01% 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.

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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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