Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REITs Rally | Rents Paid | Jobs Day Preview

Daily Recap

  • U.S. equity markets finished higher Thursday following another solid slate of economic data ahead of the critical nonfarm payrolls report tomorrow morning, the final jobs report before Election Day next-month.

  • Following gains of 0.8% yesterday, the S&P 500 finished higher by another 0.6% today while the tech-heavy Nasdaq 100 jumped 1.7% and the Dow Jones Industrial Average added 35 points.

  • Real estate equities were among the leaders today as the broad-based Equity REIT ETF (VNQ) finished higher by 2.0% today with all 18 property sectors in positive territory.

  • The BEA reported today that personal incomes remain higher by 4.7%  from last year, fueled by the existing stimulus measures which are already the largest since WWII.

  • Initial Jobless Claims ticked slightly lower to 837k. Continuing Claims decreased to 11.7 million, and since the peak in early May at around 25 million Continuing Claims have retreated by 13.2 million.

Real Estate Daily Recap

U.S. equity markets finished higher Thursday following another solid slate of economic data ahead of the critical nonfarm payrolls report tomorrow morning, the final jobs report before Election Day next month. Following gains of 0.8% yesterday, the S&P 500 ETF (SPY) finished higher by another 0.6% today while the tech-heavy Nasdaq 100 (QQQ) jumped 1.7% and the Dow Jones Industrial Average (DIA) added 35 points. Real estate equities were among the leaders today as the broad-based Equity REIT ETF (VNQ) finished higher by 2.0% today with all 18 property sectors in positive territory. Mortgage REITs (REM) gained 0.7% after finishing lower by 0.1% yesterday.

Equities have rallied over the last two days despite the continued stalemate on another round of fiscal stimulus, but strong economic data over the last week has allayed some concerns over the immediate urgency of more stimulus. The BEA reported today that personal incomes remain higher by 4.7% from last year, fueled by the existing stimulus which is still the largest since WWII. Consumer spending levels, meanwhile, are lower by just 1.9% from the last year, continuing a V-shaped rebound from the lows in April. 7 of the 11 GICS equity sectors finished higher on the day while homebuilders and the broader Hoya Capital Housing Index deliverer another day of strong gains following another strong slate of housing data this week. 

While the housing industry has shown continued strength, there are concerns that the rebound in labor markets may be losing some steam. Initial Jobless Claims ticked slightly lower to 837k from last week's upwardly revised 873k and roughly steady with the levels over the last month. Continuing Claims, however, decreased to 11.7 million, and since the peak in early May at around 25 million Continuing Claims have retreated by 13.2 million. Tomorrow morning, we'll see the nonfarm payrolls report for September. Economists are looking for employment gains of roughly 850k in September following July's better-than-expected gain of 1.3 million and for the unemployment rate to tick down to 8.2%.

We've remained quite a bit more optimistic than consensus on the employment and economic outlook since early May as the devastating economic lockdowns began to be lifted. We've discussed that investors not to underestimate the "unstoppable force" of WWII-levels of fiscal stimulus and the unprecedented levels of monetary support, and better-than-expected data has been a common theme over the last several months as the Citi Economic Surprise Index has remained at or near record-high levels. There may still be more "low-hanging-fruit" left in the rebound as roughly 65% of recent job losers continue to classify themselves as on "temporary layoff" totaling over 6 million, which is down from a peak of 18 million back in April.

Commercial Equity REITs

Among the leaders today was manufactured housing REIT Sun Communities (SUI) which earlier this week announced a deal to buy the largest marina operator in the United States, Safe Harbor Marina. As we discussed in a CoStar article, the marina business is nothing new for these REITs and SUI follows fellow MH REIT Equity Lifestyle (ELS), which owns a roughly $100 million portfolio of marinas following the acquisition of Suntex Marina in 2017. RV and recreational boat sales have surged over the last several months amid the pandemic and we think that the Safe Harbor portfolio fits nicely within SUI's existing manufactured housing and RV portfolio. 

After the close yesterday, 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. CLI joins prison REIT GEO Group (GEO), and fellow office REITs Empire State Realty Trust (ESRT), and Vornado Realty (VNO). Meanwhile, 29 equity REITs have raised dividends in 2020 to levels above their pre-pandemic rates.

We also heard a handful of rent collection and business updates over the last 24 hours. Net lease REIT Four Corners (FCPT) announced that it collected over 99% rents in Q3. Troubled mall REIT Pennsylvania REIT (PEI) announced that it collected cash receipts representing 67% of billed Q2 and Q3 rents, while also indicating that it has secured a one-month extension and obtained the flexibility for a $25M expansion of its liquidity facility. PEI also noted that September traffic across the core comparable mall portfolio registered 74% of September 2019's levels. 

Yesterday, 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.

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 1.1% today but remain lower by 0.6% on the week. Commercial mREITs gained 1.9% today and are now higher by 3.7% on the week. Yesterday, 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 higher by 0.77% today, on average, but underperformed their respective common stock issues by an average of 1.00%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.94% 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 September following August'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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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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