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  • Alex Pettee, CFA

REITs Rally • Inflation Worries • Retail Sales Steady

Summary

  • U.S. equity markets continued their rebound Friday following a three-day skid earlier in the week driven by concerns over inflation and mounting shortages.

  • Closing the week lower by roughly 1%, the S&P 500 finished higher by 1.5% today while the Mid-Cap 400 gained 1.6% and the Small-Cap 600 jumped 2.0%.

  • Finishing the week roughly even with the major averages, real estate equities were broadly higher today as the Equity REIT Index gained 1.4% with all 19 property sectors in positive territory.

  • Retail Sales were unchanged in April from the historically strong prior month, but were higher by more than 50% from April 2020. Strong spending at restaurants and bars was offset by a dip in spending in more "stimulus-sensitive" sectors.

  • The Consumer Sentiment Index was far lower than expected, tumbling to 82.8 in May from 88.3 in April. The same report showed that consumers expect inflation to average 4.6% for the next year.

Real Estate Daily Recap

U.S. equity markets continued their rebound Friday following a three-day skid earlier in the week driven by concerns over inflation and mounting shortages, which was offset in part by optimism about revised CDC guidance. Closing the week lower by roughly 1%, the S&P 500 (SPY) finished higher by 1.5% today while the Mid-Cap 400 (MDY) gained 1.6% and the Small-Cap 600 (SLY) jumped 2.0%. Finishing the week roughly even with the major averages, real estate equities were broadly higher today as the Equity REIT Index gained 1.4% with all 19 property sectors in positive territory while the Mortgage REIT Index rallied 2.0%.

Despite the focus on inflation and fears of rising interest rates, the 10-Year Treasury Yield finished the week higher by just 6 basis points at 1.64% after trading as high as 1.70% earlier this week. All 11 GICS equity sectors were higher on the day, led to the upside by the Energy (XLE), Technology (XLK), and Communications (XLC) sectors. Homebuilders and the broader Hoya Capital Housing Index after a new report from Redfin (RDFN) showed continued robust demand for housing with the typical home selling after just 18 days on the market, the lowest on record. A record-high 45% of homes that went under contract had an accepted offer within one week of hitting the market and 49% of homes sold for above their list price, also a record high.

The Commerce Department reported that Retail Sales were unchanged in April from the historically strong prior month, but were higher by more than 50% from April 2020 during the worst of the pandemic-induced lockdowns. Excluding auto and gas sales, sales were lower by 0.8% from last month as a pullback in spending at general merchandise and clothing stores was partially offset by a rebound in spending on food services and drinking establishments. Consumers continued to spend heavily on housing-related goods as the Building Materials category is higher by 33.8% from last year while Furniture sales are higher by 196.4% from last April.

While not yet captured by this data series, concerns over inflation do appear to be affecting consumer confidence in recent weeks as the Consumer Sentiment Index was far lower than expected, tumbling to 82.8 in May from 88.3 in April. The same report also showed that consumers expect inflation to average 4.6% for the next year, up sharply from the 3.4% expected rate in the prior month. The 10-Year Breakeven Inflation Rate - a measure of long-term inflation expectations implied from bond market prices - ended yesterday at 2.51%, the highest close since 2008. Earlier this week, the headline CPI and PPI Indexes both showed the highest annual jumps since at least 2008.

Commercial Equity REITs

Today, 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 1.9% today but ended the week lower by 1.4%. Commercial mREITs finished higher by 2.3% and ended the week with 2.1% declines. Connecticut-focused mortgage REIT Sachem Capital (SACH) finished modestly higher after reporting Q1 results this morning, noting that its interest income jumped 56% from last year. Dynex Capital (DX), AGNC Mortgage (AGNC), and Broadmark Realty (BRMK) each declared dividends consistent with their prior rates.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.34% today, on average, but underperformed their respective common stock issues by an average of 1.69%. So far in 2021, REIT Preferred stocks are higher by 6.46% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.61% and trades at a slight premium to par value. ACRES Commercial (ACR) priced its new 7.875% Series D Cumulative Redeemable Preferred Stock (ARC.PD) at $25/share for gross proceeds of $60M.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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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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