Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REITs Dip | Warehouse M&A | Inflation Muted

Daily Recap

  • U.S. equity markets finished lower Tuesday as earnings season officially kicked-off with lukewarm results and disappointing vaccine news while bonds rallied after CPI data showed that inflationary pressures remain muted.

  • Following gains of 1.6% yesterday, the S&P 500 finished lower by 0.6% today while the tech-heavy Nasdaq 100 finished fractionally lower and the Dow Jones Industrial Average retreated by 158-points.

  • After gaining 0.6% yesterday, REITs were under-pressure today as the broad-based Equity REIT ETF (VNQ) finished lower by 1.7% with all 18 property sectors in negative territory.

  • The 10-Year Treasury Yield dipped 5 basis points following the release of CPI data, which showed that consumer inflation rose in September at the slowest pace in four months.

  • Americold Realty (COLD) finished announced a $1.74B deal to acquire Agro Merchants Group the fourth-largest temperature-controlled warehouse company globally.

Real Estate Daily Recap

U.S. equity markets finished lower Tuesday as earnings season officially kicked-off with lukewarm results and disappointing vaccine news while bonds rallied after CPI data showed that inflationary pressures remain muted. Following gains of 1.6% yesterday, the S&P 500 ETF (SPY) finished lower by 0.6% today while the tech-heavy Nasdaq 100 (QQQ) finished fractionally lower and the Dow Jones Industrial Average (DIA) retreated by 158-points. After gaining 0.6% yesterday, REITs were under-pressure today as the broad-based Equity REIT ETF (VNQ) finished lower by 1.7% with all 18 property sectors in negative territory. The Mortgage REIT ETF (REM), meanwhile, declined by 0.6% today, erasing yesterday's gains.

Third-quarter earnings season kicked off with mixed results over the last 24 hours with JP Morgan (JPM) and Citigroup (C) under pressure after reporting lukewarm results while BlackRock (BLK) and Disney (DIS) jumped following their reports. Johnson & Johnson (JNJ) was also under pressure after it temporarily halted its coronavirus vaccine trial due to an unexplained illness. 9 of the 11 GICS equity sectors finished in the red today, led to the downside by the Financials (XLF), Commerical Real Estate (XLRE), and Energy (XLE) sectors. For the Hoya Capital Housing Index, a strong day from home improvement retailers was negated by pressure on the homebuilders while REITs were also under pressure despite a pull-back in Treasury yields. 

On that point, the 10-Year Treasury Yield (IEF) dipped 5 basis points following the release of CPI data, which showed that consumer inflation rose in September at the slowest pace in four months. After coming in hotter-than-expected in the prior two months, core inflation came in slightly below estimates, rising by 0.19% from last month, keeping the annual rate steady at 1.71%. While we don't believe that inflation is a near-term concern yet, the fiscal and monetary policy environment may end the "lower for longer" economic regime that was perhaps the defining economic trend of the 2010s.

Commercial Equity REITs Today, we published Healthcare REITs: Signs of Life. Healthcare REITs - which have been "ground-zero" of the coronavirus pandemic - have shown signs of life over the past quarter on stabilizing fundamentals and on hopes of the success of a potential vaccine. While fundamentals are far more challenged than other "essential" property sectors like technology, industrial, and housing REITs, we think that investors seeking higher-yielding REITs should generally favor these healthcare REITs over other troubled sectors facing more concerning long-term secular headwinds. Three healthcare REITs raised dividends this year while five have reduced their payouts. The positive long-term outlook for senior housing REITs, in particular, remains intact as the long-awaited Boomer-driven demand boom is finally arriving.

Never underestimate the importance of the U.S. housing market, the largest asset class in the world. Driven by a decade of historically low levels of new home construction and the resulting housing shortage, Americans have built up $10 trillion in additional home equity over the last decade with Boomers taking the "lions share" of these gains, an age cohort with the highest homeownership rate. For that reason, despite the pain inflicted by the pandemic, we believe that fears of a "retirement crisis" are largely overstated and that these accrued savings will be a key source of future spending power for healthcare services - including purpose-built senior housing.

It's expected to be a fairly quiet week of REIT-related news flow ahead of the start of real estate earnings season next week. EPR Properties (EPR) dipped more than 9% today after S&P lowered its issuer credit rating and issue-level ratings on its senior unsecured notes and credit facilities to BB+ from BBB-. Meanwhile, Americold Realty (COLD) finished modestly lower after it announced a $1.74B deal to acquire Agro Merchants Group, the fourth-largest temperature-controlled warehouse company globally. We discussed Industrial REITs acquisition activity in a report published last month. 

This afternoon, small-cap specialty REIT Gladstone Land (LAND) declared a $0.0449/share monthly dividend, a 0.2% increase from prior dividend of $0.0448. Finally, diversified REIT Preferred Apartments (APTS) reported that it collected 98% of apartment rents, 99% of office rents, and 95% of retail rents in Q3. Last week, we reported that the NMHC's Rent Payment Tracker found 79.4% of apartment households paid their rent by October 6, which was back in line with the pre-pandemic rate last October.

Most REITs have now announced the date of their earnings release, which we've compiled below. Earnings season kicks off with Prologis (PLD), Redford (REXR), Agree Realty (ADC), and Equity Lifestyle (ELS) next Tuesday. (Note that REITs that have not yet reported an earnings release date are in italics with an estimated date based on past reports.)

Mortgage REITs As tracked in our Mortgage REIT Tracker, following gains of 0.3% yesterday, residential mREITs finished lower by 0.3% today. Commercial mREITs dipped 1.0% after gaining 0.6% yesterday. 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, REIT Preferred stocks finished lower by 0.09% today, on average, but outperformed their respective common stock issues by an average of 1.80%. Today's gains were led by the preferred issues of troubled mall REITs CBL & Associates (CBL) and Washington Prime (WPG). Among REITs that offer preferred shares, the performance of these securities has been an average of 20.35% 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 Calendar After a quiet week of data, this week's busy slate of data includes inflation, housing, and retail sales data. The Consumer Price Index for September is released on Tuesday and the Producer Price Index comes out on Wednesday. Inflation showed signs of life in the prior two months after most inflation metrics hit multi-decade lows in May and June. On Friday, we'll see Retail Sales data for September and Homebuilder Sentiment data for October, both of which are coming off record-high levels. As it relates to an emerging V-shaped recovery, perhaps a "close second" to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic.

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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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