• Alex Pettee, CFA

REIT Dividend Boosts • Fresh Records • Homebuilders Lead

Summary

  • U.S. equity markets rose to fresh record-highs Tuesday on better-than-expected home sales data and strong corporate earnings results while the "fourth wave" of COVID cases has begun to recede.

  • Notching its 51st record closing high this year, the S&P 500 finished higher by 0.2% today while the Mid-Cap 400 gained 0.9% and the Small-Cap 600 rose 0.8%.

  • Real estate equities were mixed today with the COVID-sensitive sectors rebounding. The cap-weighted Equity REIT Index slipped 0.4%, but 12 of 19 property sectors finished in positive territory.

  • ExtraSpace Storage (EXR) - which reported stellar second-quarter results earlier this month - announced a 25% increase to its dividend. New Residential (NRZ) also boosted its dividend by 25%.

  • Equity Residential (EQR) and Toll Brothers (TOL) announced a partnership to develop new rental communities in key U.S. markets as rental rates continue to soar at historically high levels across the nation.

Real Estate Daily Recap

U.S. equity markets rose to fresh record-highs Tuesday on better-than-expected home sales data and strong corporate earnings results while the "fourth wave" of COVID cases in the U.S. has begun to recede. Notching its 51st record closing high this year, the S&P 500 finished higher by 0.2% today while the Mid-Cap 400 gained 0.9% and the Small-Cap 600 rose 0.8%. Real estate equities were mixed today with the COVID-sensitive sectors rebounding as the Equity REIT Index slipped 0.4% with 12 of 19 property sectors in positive territory while Mortgage REITs gained 1.3%.

Six of the eleven GICS equity sectors finished higher today, led to the upside once again by the Energy (XLE) sector as Crude Oil and the broader commodities complex have rebounded this week following steep declines last week. Ahead of the Fed's annual Jackson Hole Symposium tomorrow, the 10-Year Treasury Yield ticked higher by 2 basis points to close at 1.29%. Homebuilders and the border Hoya Capital Housing Index were among the leaders today on better-than-expected New Home Sales data and on a new partnership between a leading apartment REIT (EQR) and a homebuilder (TOL), discussed in more detail below.

On that topic, the US Census Bureau reported this morning that New Home Sales rebounded in July following three months of declines, consistent with Existing Home Sales data yesterday which showed a reacceleration in housing market activity following a lull in the Spring and early Summer. Sales increased 1% from the prior month to an annual rate of 708k - better than the consensus forecast of 700k - while June's sales figures were revised higher as well. As we'll discuss later this afternoon in a report on Timber REITs, supply chain bottlenecks and construction materials prices have slowly begun to ease over the last several months, which is expected to power a strong back-half of 2021 for the broader housing industry.

Equity REITs

Apartments & Homebuilders: Equity Residential (EQR) and Toll Brothers (TOL) announced a partnership to develop new rental communities in key U.S. markets, beginning with Atlanta, Austin, Boston, Denver, Orange County, Seattle, and Dallas-Fort Worth. EQR will invest 75% of the equity for each project and TOL will invest 25% and EQR will have the option to acquire each property upon stabilization. The parties have targeted an initial minimum co-investment of approximately $750M in combined equity, or nearly $1.9B capacity, assuming 60% leverage. Last week, Zillow (Z) reported that apartment and single-family rents are soaring at the fastest pace on record.

Storage: ExtraSpace (EXR) - which reported stellar second-quarter results earlier this month and substantially boosted its full-year guidance - boosted its dividend for the second time this year, announced a 25% increase to its dividend to $1.25/share/quarter, representing a forward yield of 2.82%. 78 equity REITs have now raised their dividend thus far in 2021 while an additional 20 mortgage REITs have boosted their payouts. Catalyzed by the suburban housing boom and the desire for more space, self-storage demand has dramatically rebounded over the last twelve months, powering the most comprehensive "beat and raise" quarter for any REIT sector in recent memory.

Mall: Pennsylvania REIT (PEI) gained more than 2% today after announcing that its malls recorded sales in July that were 17% above 2019 levels. Last Friday, we published Fears of Double Dip. For the battered mall REIT sector, glimmers of hope were beginning to emerge following a punishing 2020 on signs of stabilizing in occupancy rates and normalizing rent collection, but dark clouds have reemerged amid a resurgence in COVID cases across the globe. Net Operating Income surged more than 40% in Q2 - albeit from easy comps - driven by a recovery in rent collection to 94%. Despite the rebound, however, full-year FFO will remain 20-50% below pre-pandemic levels across the sector.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 1.3% today to push their week-to-date gains to 2.5%. Commercial mREITs gained 1.0% today and are now higher by 1.5% this week. New Residential Investment (NRZ) jumped more than 6% today after boosting its dividend by 25% to $0.25/share/quarter, representing a forward yield of roughly 10%. The average residential mREIT pays a dividend yield of 9.0% while the average commercial mREIT pays a dividend yield of 6.9%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.80%, on average, but underperformed their respective common stock issues by an average of 0.25%. Pebblebrook (PEB) completed its previously-announced redemption of its 6.50% Series C (PEB.PC) and 6.375% Series D Preferred (PEB.PD). So far in 2021, REIT Preferred stocks are higher by 9.38% on a price return basis. The average REIT preferred pays a current yield of 5.99% and trades at a slight premium to par value.


Economic Data This Week

The busy week of economic and housing data continues on Wednesday as investors will be closely monitoring the Federal Reserve's annual Jackson Hole Symposium, looking for clues into changes in the Fed's outlook in light of the recent COVID resurgence. We'll see inflation and consumer spending data on Friday with the PCE Price Index - the Fed's "preferred" gauge of inflation - expected to show that consumer prices rose at the fastest rate in decades in July as well as Personal Income & Spending 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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