Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REITs Flat In Q3 | Record Home Sales | Dividend Bump

Daily Recap

  • U.S. equity markets bounced-back Wednesday on the final day of a volatile third quarter on a strong slate of economic data and positive vaccine news following a contentious Presidential debate.

  • Finishing with gains of 8.5% in Q3, the S&P 500 finished higher by 0.8% today while the tech-heavy Nasdaq 100 gained 0.7% today to end the quarter with roughly 11%.

  • Ending the quarter almost exactly flat, the broad-based Equity REIT ETF (VNQ) finished higher by 0.3% today with 11-of-18 property sectors in positive-territory. Mortgage REITs ended the quarter with 4% gains.

  • Equities rallied on better-than-expected ADP employment data, which showed that U.S. firms added 749,000 jobs in September, far better than the 430k expected. Chicago PMI data also unexpectedly jumped to a 21-month high of 62.4 in September.

  • Housing market data, which continues to be a bright spot of the recovery, was also better-than-expected with record-setting Pending Home Sales data and data showing robust mortgage demand for home purchases.

Real Estate Daily Recap

U.S. equity markets bounced-back Wednesday on the final day of a volatile third quarter on a strong slate of economic data and positive vaccine news following a contentious Presidential debate last night. Finishing with gains of 8.5% in Q3, the S&P 500 ETF (SPY) finished higher by 0.8% today while the tech-heavy Nasdaq 100 (QQQ) gained 0.7% today to end the quarter with roughly 11% gains. Ending the quarter almost exactly flat, the broad-based Equity REIT ETF (VNQ) finished higher by 0.3% today with 11 of 18 property sectors in positive territory. Mortgage REITs (REM) declined 0.1% but ended the quarter with gains of roughly 4%. 

Stock futures initially traded lower after a contentious - and at times, ugly - Presidential debate last night. Equities began to rally following better-than-expected ADP employment data this morning, which showed that U.S. firms added 749,000 jobs in September, far better than the 430k expected. Chicago PMI data, released at the same time, also unexpectedly jumped to a 21-month high of 62.4 in September. Housing data, which continues to be a bright spot of the recovery, was also better-than-expected with record-setting Pending Home Sales data and data showing robust mortgage demand for home purchases. 9 of the 11 GICS equity sectors were higher on the day, led by the Healthcare (XLV), Financials (XLF), and Consumer Staples (XLP) sectors while homebuilders led the Hoya Capital Housing Index to another day of gains.

On that point, the National Association of Realtors reported this morning that Pending Home Sales in August rose 8.8% from last month and 24.2% from last year, reaching the strongest highest pace on record. Last week, the Census Bureau reported that New Home Sales topped estimates, surging 43% in August from last year to the highest annual rate since 2006 while the NAR reported that sales of Existing Homes rose by 10.5% from last year to the strongest sales pace in 14 years. Last week, we published Homebuilders: A V-Shaped Vendetta. An antihero of the prior financial crisis, Homebuilders have seemingly been on a vendetta over the last six months, asserting themselves as the unexpected leader of the early post-pandemic recovery.

There are few signs of cooling in the red-hot housing market either, as the Mortgage Bankers Association reported that mortgage applications to purchase a single-family home rose again last week and are now higher by 22% from last year. The 30-Year Fixed Mortgage Rate with conforming loan balances stands at 3.05%, at record-low levels, and down nearly 75 basis points from last year. Record-low inventory levels combined with robust levels of homebuying activity have put substantial upward pressure on home values since the start of the pandemic. Yesterday we reported that the Case Shiller National Home Price Index recorded a 4.8% year-over-year rise in national home prices, the largest annual gain since late 2018.

Commercial Equity REITs

Today, 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. Hotel REITs are the single-most economically sensitive REIT sector. Every hotel REIT has slashed its dividend since the start of the pandemic in an effort to stay afloat, as 40-50% occupancy is needed to "keep the lights on." Perhaps a more "pure play" on the success of a vaccine than even the pharmaceuticals themselves, the balance of risks for the better-capitalized hotel REITs may be skewed to the upside, however, with dozens of vaccines and therapeutics in the pipeline led by Moderna (MRNA), Pfizer (PFE) and BioNTech (BNTX), and AstraZeneca (AZN).

Net lease REIT Agree Realty (ADC) reported this afternoon that it received September rent payments from 99% of its portfolio, up from 96% and 97% in July and August, respectively. In total, the firm receives Q3 rent payments from 97% of its portfolio, consistent with a strong recovery in rent collection to roughly "normal" levels from the majority of net lease REITs. ADC is one of 29 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates - primarily in the "essential" property sectors - technology, housing, and industrials - but other property sectors including net lease have come on strong of late.

After the close today, office REIT Mack Cali (CLI) announced that it will be suspending its common dividend for the third and fourth quarters of 2020 and intends to revisit the resumption of the dividend in Q1 2021. CLI became the 6th office REIT and the 65th equity REITs have reduced or suspended their dividend in 2020. As we highlighted last week, since the end of June, just four REITs have reduced or suspended dividends: prison REIT GEO Group (GEO), and office REITs Empire State Realty Trust (ESRT), and Vornado Realty (VNO).

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished lower by 0.5% today and are now lower by 1.7% on the week. Commercial mREITs declined by 0.2% today but remain higher by 1.9% on the week. Invesco Mortgage (IVR) declared a $0.05/share quarterly dividend this afternoon, an increase from its prior dividend of $0.02, but still far below its pre-pandemic rate of $0.50. IVR now trades with a relatively healthy forward yield of 7.37%. 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 lower by 0.17% today, on average, but outperformed their respective common stock issues by an average of 0.09%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.14% 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

Employment data highlights this week's jam-packed economic calendar, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for employment gains of roughly 850k in August following July's better-than-expected gain of 1.3 million and for the unemployment rate to tick down to 8.2%. We'll see more housing data as well with Pending Home Sales on Wednesday along with the weekly MBA Mortgage Application data. We'll also see Construction Spending data and Personal Income and Spending data on Thursday and a flurry of PMI data throughout the week.

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