Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REIT Dividend Hikes | Home Prices Surge | Earnings Recap

Daily Recap

  • U.S. equity markets finished mostly lower Tuesday despite a solid slate of economic and corporate earnings this morning as the "second wave" of the pandemic and political uncertainty pressured sentiment.

  • Following a 1.9% dip yesterday, the S&P 500 declined by 0.3% today while the tech-heavy Nasdaq 100 finished higher by 0.8% and the Dow Jones Industrial Average declined by 222-points.

  • Real estate equities were under-performers today amid a busy 24-hours of earnings results, however, as the broad-based Equity REIT ETF (VNQ) declined by 1.6%.

  • NexPoint Residential (NXRT) - which owns a Sunbelt-heavy multifamily portfolio - jumped after reporting strong rent collection and rent growth metrics and boosted its quarterly dividend by 9.2%, becoming the 35th equity REIT to raise its dividend in 2020.

  • The trend of stellar housing data continued as home prices rose by the strongest rate in two years as record-setting demand for single-family housing clashes with record-low inventory levels. All regions in the Case Shiller House Price Index reported accelerating home price appreciation.

Real Estate Daily Recap

U.S. equity markets finished mostly lower Tuesday despite a solid slate of economic and corporate earnings results this morning as the "second wave" of the pandemic and political uncertainty weighed on investor sentiment. Following a 1.9% dip yesterday, the S&P 500 ETF (SPY) declined by 0.3% today while the tech-heavy Nasdaq 100 (QQQ) finished higher by 0.8% and the Dow Jones Industrial Average (DIA) declined by 222 points. Real estate equities were under-performers today amid a busy 24-hours of earnings results as the broad-based Equity REIT ETF (VNQ) declined by 1.6% today with 17 of 18 property sectors finishing in negative territory while the Mortgage REIT ETF (REM) declined by 0.2%.

With a stimulus deal seemingly off-the-table before next week's election, investors have been focused on rising coronavirus case counts across the world, which prompted several European countries to reimpose "lockdown" measures. Meanwhile, Pfizer (PFE) disappointed markets by declining to provide a status update on their leading vaccine candidate. 9 of the 11 GICS equity sectors finished lower today while Communications (XLC) and Technology (XLK) were the lone sectors in the green. Economic data continues to beat expectations, however, as data today showed a continued rebound in durable goods orders and is now lower by just 1.9% from last year, a sharp V-shaped rebound from its April lows when it was lower by more than 30%.

Speaking of V-shaped recoveries, the trend of stellar housing data continued as home prices rose by the strongest rate in two years as record-setting demand for single-family housing clashes with record-low inventory levels. The S&P Case Shiller National Home Price index showed a 5.7% year-over-year rise in home prices in August, a jump from 4.8% last month. All 19 cities in the composite saw accelerating price appreciation from last month. In our Mortgage REIT Report published this morning, we discussed how mortgage REITs have benefited from this insatiable home buying activity, surging home prices, and fiscal and regulatory support which have combined to stabilize the mortgage markets and push the foreclosure rate to record-lows.

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: NexPoint Residential (NXRT) - which owns a Sunbelt-heavy multifamily portfolio - jumped 3.8% today after it reported this morning that same-store NOI jumped 4.5% in Q3 driven by a 1.8% rise in effective rents. NXRT also boosted its quarterly dividend by 9.2%, becoming the 35th equity REIT to raise its dividend in 2020. This afternoon, Equity Residential (EQR) - which owns a more urban-heavy portfolio in coastal markets - reported an 8.4% decline in same-store NOI growth as rental rates in their Urban Core markets plunged 14.7% in Q3 and remained under pressure in October with year-over-year declines of 21.4%. 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.

Shopping Centers: SITE Centers (SITC) dipped 5.5% today after it 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) declined by 4.5% today after it reported yesterday afternoon 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) declined by 2.2% after it reported yesterday afternoon 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) reported after the close today that it collected 99% of Q3 rents and 99% of rents in October. It's 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.

Data Center: QTS Realty (QTS) declined by 2.4% after it kicked off data center earnings yesterday afternoon by reporting 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. We'll hear results from Equinix (EQIX) on Wednesday and from Digital Realty (DLR) on Thursday.

Student Housing: American Campus Communities (ACC) gained 1.6% today after it reported yesterday afternoon that it received 97% of rent for the month of September, the first full month of the new academic year. ACC achieved an average rental rate increase of 1.1% and is 90.3% leased for 2021 same-store properties as of September 30, 2020 versus 97.4% for the same date prior year. This leasing rate and rent growth figures were far above the potentially catastrophic figures some investors feared given the lingering school shutdowns. Students at flagship universities in "college towns" have shown a desire to live on-or-near campus regardless of whether classes are held physically in-session or completed remotely. On the earnings call, we'll be listening for commentary on leasing trends for the Spring semester.

Healthcare: Alexandria Real Estate (ARE) finished lower by 0.3% today after reporting 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. 

Timber: PotlatchDeltic (PCH) dipped 4.4% today despite reporting strong results after the close yesterday as revenues and net income rebounded significantly from last quarter. CEO Mike Covey commented: “Our Timberlands and Wood Products businesses achieved record financial performance as outstanding operational execution by our employees capitalized on the historic run in lumber prices." Caught off-guard by the velocity of the rebound in lumber demand from single-family homebuilding and remodeling activity, timber REITs have struggled to meet customer demand. Lumber prices (LB1:COM) soared to record highs by late summer from the combination of insatiable demand and reduced supply resulting from pandemic-related production shutdowns and forest fires raging in the Pacific Northwest.

Office: Boston Properties (BXP), Highwoods (HIW), and American Assets (AAT) report results after the close today, which we'll discuss in tomorrow's report. Despite reporting near-perfect rent collection throughout the pandemic, office REITs continue to be under pressure as the “work from home” paradigm threatens the long-term outlook. Survey data and commentary from corporations indicate that the WFH paradigm is here to stay long after the pandemic subsides. Technology like Zoom (ZM) has accelerated the pre-existing trends of increased workplace efficiency. Nuance is required, however, as suburban and Sunbelt office assets are likely to see robust demand over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival."

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 0.6% today and are now off by 3.1% this week. Commercial mREITs gained 0.4% today but remain lower by 2.5% this week. Apollo Commerical (ARI) jumped more than 4% today after it reported yesterday afternoon that it received 100% of interest payments in Q3 and expects perfect collection to continue into October. Its Book value per share was $15.30 at the end of Q3, up 1% in the quarter. AGNC Investment (AGNC) gained 1.1% today after it reported that its tangible BVPS rose 6.4% in Q3 to $15.88. KKR Real Estate (KREF) finished higher by 0.2% after it reported yesterday afternoon that its Book Value Per Share rose 0.9% from last quarter to $18.73. 

As mentioned above, today 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. Instead, surging home prices have pushed the foreclosure rate to record-lows. Mortgage REIT earnings season officially kicks off this week. The 3 trends we're watching: 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 0.32% today, on average, but outperformed their respective common stock issues by an average of 1.24%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.96% 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 in the week ahead. 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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