• Alex Pettee, CFA

REITs Lead • Mall Earnings • Housing Shortages

Summary

  • U.S. equity markets finished lower Tuesday despite a strong slate of retail earnings as investors remain concerned about the impact of supply chain constraints and rising input prices.

  • Following declines of 0.3% on Monday, the S&P 500 finished lower by 0.9% today while the Mid-Cap 400 declined by 1.0% and the Small-Cap 600 dipped 1.1%.

  • Real estate equities were mixed with the Equity REIT Index finishing fractionally higher with 7 of 19 property sectors in positive territory while the Mortgage REIT Index gained 0.2%.

  • Home Depot (HD) reported stellar results this morning with comparable-store sales rising 31.0% in Q1. The home improvement retailer attributed the outperformance to a "very strong and strengthening housing market."

  • New home construction moderated a bit from historically-strong levels. Data indicated that some builders have been forced to delay incremental projects due to supply chain shortages of critical construction materials.

Real Estate Daily Recap

U.S. equity markets finished lower Tuesday despite a strong slate of retail earnings as investors remain concerned about the impact of supply chain constraints and rising input prices. Following declines of 0.3% on Monday, the S&P 500 (SPY) finished lower by 0.9% today while the Mid-Cap 400 (MDY) declined by 1.0% and the Small-Cap 600 (SLY) dipped 1.1%. Real estate equities were mixed with the "essential" property sectors leading on the upside as the Equity REIT Index finished fractionally higher with 7 of 19 property sectors in positive territory while the Mortgage REIT Index gained 0.2%.

Market turbulence remains the theme of the past month as nine of the eleven GICS equity sectors finished lower on the day, dragged to the downside by the Energy (XLE) and Industrials (XLI) sectors. Within the Hoya Capital Housing Index, a strong day from residential REITs was offset by a pull-back from the high-flying homebuilders as housing data reflected the impacts of surging materials costs and shortages of many critical construction inputs as housing demand continues to far outstrip supply.

New home construction in the United States moderated a bit from historically strong levels according to data this morning from the Census Bureau. Data this month indicated that some builders have been forced to delay incremental projects due to supply chain shortages of construction materials - particularly lumber - as the number of homes that are permitted but not yet started surged by the most since May of 1972. Overall, housing starts declined 9.5% from the prior month to a seasonally adjusted annual rate of 1.569, but were higher by 67.3% from last April. The prior month saw the highest level of housing starts since June 2006 as the U.S. housing market continues to be a critical source of strength for the broader global economy.

On that same theme, Home Depot (HD) reported stellar results this morning with comparable-store sales rising 31.0% in Q1, topping consensus estimates of 20% growth. Customer transactions grew 19% to 447.2M, and the average ticket price increased 10.3% to $82.37, driving an increase in sales per retail square foot of 29.8% to $605.60. On the earnings call, the company commented, "the housing environment continues to remain very strong and it’s only strengthened from last year. The current shortage of new housing clearly is helping to drive improvements in the home values, which is a good thing for spending in the home." Fellow home improvement retailer Lowe's (LOW) reports results tomorrow.

Commercial Equity REITs

Timber: Today, we published Timber REITs: Lumber Shortage Inflames. Reignited by the red-hot U.S. housing market, timber REITs and lumber producers have "caught fire" since mid-2020 as lumber prices have soared to record highs amid a historic supply shortage. Caught flat-footed by the velocity of the rebound in lumber demand from homebuilding and remodeling activity, sawmills are scrambling to catch-up as producers invest in building immediate and long-term capacity. Recent commentary suggests that bottlenecks may be beginning to ease, which is good news for these REITs and the broader housing industry and Q1 earnings results showed that the vertically-integrated timber REITs are starting to fire on all cylinders.

Malls: Bankrupt mall REIT CBL Properties (OTCPK:CBLAQ) finished lower by about 2% today after reporting Q1 results this morning. Total Portfolio same-center NOI declined -17.2% in Q1, which was actually a deceleration from the prior quarter's decline of -14.9%. Portfolio occupancy declined another 210 basis points from last quarter to 85.4%, representing a 410-basis point decline compared Q1 of 2020. On the upside, rent collection did improve to 89% in Q1, up from its trough in Q2 of 2020 of around 30%. Results across the mall sector indicated that occupancy rates have not yet bottomed with another 90 basis point decline in Q1 and 370 bps from last year.

Last week, we published REIT Earnings Recap. Overshadowed by concerns about rising inflation, a frenzy of real estate earnings reports over the last month has provided critical information on the state of the real estate industry. Results were better than expected across most major property sectors with roughly 80% of the 170 equity REITs and 40 mortgage REITs in our coverage universe beating consensus FFO estimates. Positive surprises were primarily in the residential sectors where self-storage, manufactured housing, and sunbelt-focused single-family and multifamily REITs saw accelerating rent growth.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.2% today to push their weekly gains to 0.9%. Commercial mREITs finished flat but remain higher by 0.5% on the week. On a slow news day, multifamily-focused ACRES Realty (ACR) was the leader with gains of 5.0% while Colony Credit (CLNC) and Apollo Commercial (ARI) were laggards. This afternoon, Ellington Financial (EFC) announced its estimated book value per common share of $18.21 as of April 30, up five cents from its reported BVPS of $18.16 at the end of March.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.17% today, on average, and underperformed their respective common stock issues by an average of 1.26%. Digital Realty (DLR) completed the redemption of its 6.625% Series C Preferred (DLR.PC) but still has three preferred issues outstanding. In the bond markets, apartment RIET Essex Property (ESS) priced $300 million of 2.55% senior notes due 2031, intending to use the proceeds to redeem its 3.375% senior unsecured notes due January 2023.

Economic Data This Week

The jam-packed week of economic data continues tomorrow with MBA Mortgage Market data and we'll see Jobless Claims data on Thursday. Then on Friday, we'll see Existing Home Sales for April which is expected to climb to a 6.1M annualized rate as the Spring housing season heats up.

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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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