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  • Alex Pettee, CFA

REITs Rally | Rent Updates | Return To Work

Daily Recap

  • Equity markets finished higher Thursday as signs of potential progress on a stimulus deal and a generally encouraging slate of employment data pushed the major averages to their highest-close in five-weeks.

  • Adding to yesterday's 1.7% gains, the S&P 500 finished higher by 0.8% today while the tech-heavy Nasdaq 100 gained 0.6% and the Dow Jones Industrial Average gained 122 points.

  • Real estate equities led the way today with the broad-based Equity REIT ETF (VNQ) rallying by 1.7% with 17 of 18 property sectors in positive-territory while Mortgage REITs jumped 2.6%.

  • Through Thursday, equity markets are on-pace for another week of strong gains, led by the Small-Cap (SLY) and Mid-Cap (MDY) indexes, which are on-pace to match their roughly 5% gains last week.

  • Return to Work: Continuing Jobless Claims decreased to 10.98 million, down exactly one million from last week. Since the peak in early May at around 25 million, Continuing Claims have retreated by 13.9 million.

Real Estate Daily Recap

U.S. equity markets finished higher Thursday as signs of potential progress on a stimulus deal and a generally encouraging slate of jobless claims data pushed the major averages to their highest close in five weeks. Adding to yesterday's 1.7% gains, the S&P 500 ETF (SPY) finished higher by 0.8% today while the tech-heavy Nasdaq 100 (QQQ) gained 0.6% and the Dow Jones Industrial Average (DIA) added 122-points. Real estate equities led the way today with the broad-based Equity REIT ETF (VNQ) rallying by 1.7% with 17 of 18 property sectors in positive territory while the Mortgage REIT ETF (REM) jumped 2.6% today.

Solid economic data this week and a "refreshingly normal" Vice Presidential debate last night appear to have instilled some confidence in a market that continues to get whipsawed from the on-again-off-again status of stimulus negotiations. Through Thursday, equity markets are on-pace for another week of strong gains, led by the Small-Cap (SLY) and Mid-Cap (MDY) indexes, which are on-pace to match their roughly 5% gains last week. All 11 GICS equity sectors finished higher on the day, led by the Energy (XLE), Utilities (XLU), and Commercial Real Estate (XLRE) sectors. Strong earnings from homebuilding products company PPG, Inc (PPG) helped to homebuilders and the broader the Hoya Capital Housing Index to another day of solid gains as data this morning showed that mortgage rates remain near record-lows.

Data from the Department of Labor showed that Initial Jobless Claims ticked slightly lower to 840k from last week's upwardly revised 849k and roughly steady with the levels over the last month. Continuing Claims, however, decreased to 10.98 million, down exactly one million from last week. Since the peak in early May at around 25 million Continuing Claims have retreated by 13.9 million. Last week, the Bureau of Labor Statistics reported this week that the U.S. economy added 661k jobs in September - slightly below economists' estimates for gains of 860k, but private payrolls actually beat estimates with gains of 887k. The "headline" unemployment rate, however, ticked down to 7.9% from 8.4% in the prior month, also better than estimates. 

Commercial Equity REITs Today, we published Prison REITs: The End Is Near. Prison REITs - the darkest corner of the REIT sector - have been slammed in 2020 as pandemic-related operational struggles have clashed with ever-intensifying political headwinds. Private prisons are facing an existential crisis if Democrats sweep the 2020 Elections, who have pledged to abolish the Federal use of private prisons, amounting to 50% of industry revenues. CoreCivic (CXW) announced it is abandoning the REIT structure, and GEO Group (GEO) likely isn’t far behind. While intrinsic value exists - and the U.S. needs somewhere to house its roughly two million inmates - these companies will likely face continued difficulty operating as public entities.

We heard a few more business updates and rent collection reports over the last 24 hours ahead of the start of Q3 earnings season in about 10 days. Net lease REIT American Finance Trust (AFIN) jumped 3.5% today after it announced that it collected 91% rent due for the third quarter. Shopping center REIT Federal Realty (FRT) gained 2.7% today after it provided a business update yesterday afternoon in which it noted that it collected 83% of third-quarter rents, up from its initially-reported Q2 collection rate of 68%. Gladstone Land (LAND) dipped more than 5% on plans for a secondary equity offering, intending to use the net proceeds to repay debt.

Industrial REIT Terreno Realty (TRNO) provided a pre-earnings update after the close today in which it announced that it achieved a 20.3% increase in cash rents on new and renewed leases in Q3 and a 25.2% increase year-to-date. TRNO's portfolio was 98.5% occupied at the end of Q3, up a solid 200 basis points from the 96.5% rate last quarter. As discussed in our recent Industrial REIT report, while much of the REIT sector was slashing dividends this year, nearly half of industrial REITs have raised dividends in 2020. TRNO is one of 6 industrial REITs and one of 29 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates.

Earlier this week, we published Manufactured Housing REITs: Not Enough Homes, So Onto Boats. Manufactured housing REITs ("MH REITs") have proven to be relatively immune from coronavirus-related headwinds that have slammed much of the real estate sector, collecting nearly 100% of rents while also boosting dividends this year. Amid this housing shortage, MH REITs have begun investing in a new - but fundamentally similar - asset class: boat marinas. After a sharp slowdown in late-Spring, recreational vehicle and boat sales have smashed records this summer while the U.S. housing market has roared back to life. MH REITs aren't cheap, but long-term fundamentals remain stellar for this "essential" property sector.

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 2.8% today and are now higher by 3.1% this week. Commercial mREITs finished higher by 2.3% today and are now up by 1.6% this week. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates.  Last month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

This afternoon, AGNC Investment (AGNC) declared a $0.12/share monthly dividend, in line with it's previous (reduced) rate. Ellington Financial (EFC) also declared $0.09/share monthly dividend, also in line with its previous (reduced) rate. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised.

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.46% today, on average, but underperformed their respective common stock issues by an average of 1.63%. The preferred shares of Ashford Hospitality (AHT) jumped by 10.9% today, on average, on the expiration of the controversial tender offer. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.44% 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

The economic calendar slows down in the week ahead after a frenetic slate of employment and housing data over the last two weeks. This morning, we saw a flurry of PMI data which showed a continued rebound in services activity in September. On Tuesday, we'll see JOLTs Job Openings data, a detailed (but backward-looking) breakdown of employment trends in August. As usual, we'll also be watching the weekly MBA Weekly Mortgage Applications data on Wednesday and Jobless Claims data on Thursday.

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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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