• Alex Pettee, CFA

REIT Mega-Merger • Happy Homebuilders • Retail Revival

Summary

  • U.S. equity markets climbed to fresh record-highs Thursday after retail sales and housing data showed a reacceleration in early Spring while jobless claims declined to the lowest level since last March.

  • Real estate equities were among the leaders today as the broad-based Equity REIT ETFs jumped 1.8% 17-of-19 property sectors in positive territory. Mortgage REITs finished flat.

  • Kimco Realty (KIM) and Weingarten Realty (WRI) announced a merger to become the largest open-air shopping center REIT with a pro forma equity market cap of roughly $12B.

  • Boosted by the third wave of stimulus checks, Retail Sales were historically strong in March, surging by 9.8% from the prior month and were higher by 27.7% from the prior year.

  • Homebuilder Confidence data showed that Home Buyer Traffic climbed to the second-highest level on record last month as the red-hot housing industry looks to build further strength into the Spring buying season.

Real Estate Daily Recap

U.S. equity markets climbed to fresh record-highs Thursday after retail sales and housing data showed a reacceleration in early Spring while jobless claims declined to the lowest level since last March. Lifting its week-to-date gains to over 1%, the S&P 500 ETF (SPY) finished higher by 1.1% today while the Mid-Cap 400 (MDY) gained 0.7% and the Small-Cap 600 (SLY) climbed 0.4%. Real estate equities were among the leaders today as the broad-based Equity REIT ETFs (VNQ) jumped 1.8% 17-of-19 property sectors in positive territory while the Mortgage REIT ETFs (REM) finished flat.

The "American Exceptionalism" pattern is back this week as U.S. equities, bonds, and the U.S. dollar have rallied in synchrony. Despite strong economic data this morning, the 10-Year Treasury Yield retreated to the lowest levels since early March amid continued COVID issues abroad. Nine of the eleven GICS equity sectors finished higher on the day, led to the upside by Real Estate (XLRE), Technology (XLK), and Healthcare (XLV). A strong day from residential REITs lifted the Hoya Capital Housing Index to fresh record highs following better-than-expected housing data this morning.

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 - climbed one point to 83 in April from last month as homebuilders continue to sell homes as quickly as they can build them. The sub-index for Traffic of Prospective Buyers climbed to the second-highest level on record, offsetting some pressure from concerns over rising costs and constraints on land and lumber. We'll see more housing data tomorrow when the Census Bureau reports Housing Starts and Building Permits.

Elsewhere on the economic data front, the Census Bureau reported that Retail Sales were stronger than consensus estimates in March, surging by 9.8% from the prior month and were higher by 27.7% from the prior year. Sales were boosted by the third wave of stimulus checks as all categories recorded a sequential increase in sales. Clothing sales more than doubled from last March during the initial wave of economic lockdowns. Consumers continued to spend heavily on housing-related goods as the Building Materials category is higher by 29.4% from last year while Furniture sales are higher by 46.8%.

Commercial Equity REITs

Shopping Center: Kimco Realty (KIM) and Weingarten Realty (WRI) announced a merger to become the largest open-air shopping center REIT with a pro forma equity market cap of roughly $12B. The merger will create a national operating portfolio of 559 open-air grocery-anchored shopping centers and mixed-use assets comprising approximately 100 million square feet of gross leasable area. Under the terms of the agreement, each WRI share will be converted into 1.408 newly issued Kimco shares plus $2.89 in cash, valuing each WRI share at $30.32, an 11% premium to WRI's closing stock price on Wednesday and is expected to close during the second half of 2021.

Storage: This merger announcement is the second major M&A development of the week following Public Storage's (PSA) announcement that it plans to acquire ezStorage - the largest self-storage company in Maryland, Virginia, and Washington DC - for $1.8B. PSA announced today that it has priced $2B of senior notes to fund the acquisition in three tranches: 1) a $700M tranch of floating-rate notes due April 2024; 2) a $650M tranch of 1.850% fixed-rate notes due May 2028; and 3) a $650M tranch of 2.3% fixed-rate notes due May 2031. We believe that acquisition and consolidation opportunities should be plentiful over the next decade for storage REITs as the weaker operators are "shaken out" by COVID dislocations.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by -0.5% today and are now lower by 0.7% on the week. Commercial mREITs were flat today but remain higher by 2.1% on the week. Orchid Island (ORC) dipped more than 11% today after announcing preliminary Q1 results yesterday afternoon that were weaker than consensus estimates. ORC noted that its Book Value Per Share ended the quarter at $4.94, a 9.5% decline from last quarter. Excluding the impact of the dividend - representing a forward yield of 12.7% - the economic book value declined by 6.0%.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished flat today, on average, but underperformed their respective common stock issues by an average of -0.18%. So far in 2021, REIT Preferred stocks are higher by 6.57% on a price-return basis and the average REIT preferred currently pays a dividend yield of 6.29% and trades at a slight discount 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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