• Alex Pettee, CFA

REITs Lead • Rents Rise • Week Ahead

Summary

  • U.S. equity markets finished mostly-higher Monday as investors assessed the economic impacts of Hurricane Ida and digested comments last week from the Fed ahead of a busy week of employment data.

  • Climbing to its 12th record-high of August alone, the S&P 500 gained another 0.4% today, but the Mid-Cap 400 slipped 0.3% and the Small-Cap 600 declined 0.5%.

  • Led by residential REITs, real estate equities were broadly higher today with the Equity REIT Index gaining 1.0% on the day with 14 of 19 property sectors in positive-territory.

  • Investment manager KKR announced plans to acquire more than $3B in net leased properties through a new investment platform, Strategic Lease Partners, which is led by former executives at WP Carey.

  • We have another busy slate of economic and housing data in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday.

Real Estate Daily Recap

U.S. equity markets finished mostly higher Monday as investors assessed the economic impacts of Hurricane Ida and digested comments last week from the Fed ahead of a busy week of employment data. Climbing to its 12th record-high of August alone, the S&P 500 gained another 0.4% today, but the Mid-Cap 400 slipped 0.3% and the Small-Cap 600 declined 0.5%. Led by residential REITs, real estate equities were broadly higher today with the Equity REIT Index gaining 1.0% on the day with 14 of 19 property sectors in positive territory while Mortgage REITs slipped 0.6%.

As discussed in our Real Estate Weekly Outlook, signs of a potential apex in the "fourth wave" of COVID have sparked a rotation back into economically sensitive sectors, but the reopening trade was dealt a setback today after the E.U. slapped fresh restrictions on nonessential travel to the U.S. Seven of the eleven GICS equity sectors were higher today, led to the upside by the Technology (XLK) and Commerical Real Estate (XLRE) sectors as a strong day for residential REITs also lifted the Hoya Capital Housing Index to modest gains as well following fresh data showing that rents continue to soar at historically high rates across most major markets in the country.

We have another busy slate of economic and housing data in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 728k in August, a slowdown from the 943k rate of job growth in July while the unemployment rate is expected to tick down to 5.2%. We'll also see Case Shiller Home Price data on Tuesday, and Construction Spending data on Wednesday, as well as a flurry of Purchasing Managers Index ("PMI") data throughout the week.

Equity REITs

Net Lease: Last Friday, investment manager KKR (KKR) announced plans to acquire more than $3B in net leased properties through a new investment platform, Strategic Lease Partners, which is led by former executives at WP Carey (WPC). The platform will acquire assets and arrange sale-leasebacks of net leased properties across various property types. For net lease REITs, acquisition-fueled growth - the "bread and butter" of the sector - has kicked back into gear over the last several quarters, underscored by Realty Income's (O) massive acquisition of VEREIT (VER) earlier this year.

Casinos: Tonight, we will publish New King of Vegas which will discuss the mega-merger between VICI Properties (VICI) and MGP Properties (MGP) and analyze recent fundamental performance of the broader casino property sector. The mega-merger will give the combined firm a dominant competitive position in the critical Las Vegas market and appears to be a win-win for both VICI and MGP shareholders. Despite their strong returns since emerging in the mid-2010s and steady performance throughout the pandemic, casino REITs have traded at persistent discounts relative to their net lease REIT peers. With an average dividend yield above 5%, we view casino REITs as a more compelling - and perhaps "under the radar" - alternative to other seemingly "cheap" sectors facing stiffer secular headwinds.

This weekend, we published 100 REIT Dividend Hikes. Following the wave of pandemic-driven dividend cuts across the REIT sector last year, we've seen a similarly powerful wave of dividend increases this year, passing the century mark last week with six additional hikes. We discussed in our State of the REIT Nation report how REIT company-level metrics have exhibited a substantial rebound over the last year as FFO and dividends per share have now fully recovered the sharp declines from early in the pandemic. From the prior year, FFO rose 20.8% while Dividends Per Share sequentially rose by 2.2%. With FFO growth significantly outpacing dividend growth, REIT dividend payout ratios dipped to just 61% in Q2 - well below the 20-year average of 75%.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.7% today after ending last week with gains of 3.2%. Commercial mREITs declined by 0.1% today following weekly gains of 2.8%. On a slow day of newsflow, Hannon Armstrong (HASI) led to the upside while Western Asset Mortgage (WMC) was the laggard. The average residential mREIT pays a dividend yield of 8.9% while the average commercial mREIT pays a dividend yield of 6.7%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.06%, on average, and outperformed their respective common stock issues by an average of 0.39%. So far in 2021, REIT Preferred stocks are higher by 11.00% on a price return basis. The average REIT preferred pays a current yield of 5.87% and trades at a slight premium 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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