• Alex Pettee, CFA

REITs Rebound • Dividends Raised • Housing Stays Hot

Summary

  • U.S. equity markets were mixed Friday, ending the week with modest declines, as a strong slate of economic and housing data propelled inflation expectations and interest rates to mid-pandemic highs.

  • Ending the week with declines of 0.7%, the S&P 500 finished lower by 0.2% today while the Dow Jones Industrial Average was higher by a point. Mid-Caps and Small-Caps rallied 1.5% each.

  • Real estate equities were broadly higher today following another wave of dividend boosts and solid earnings reports as the broad-based REIT ETFs finished higher by 0.6%. 17-of-19 property sectors finished higher.

  • The wave of dividend boosts across the REIT sector continued over the last 24 hours as two more equity REITs and two mortgage REITs raised their payouts. 26 REITs have raised their dividend this year.

  • Existing Home Sales were stronger-than-expected in January as the housing industry continues to lead the early economic recovery. Housing inventory levels dipped to historic lows as homebuilders struggle to keep up with surging demand.

Real Estate Daily Recap

U.S. equity markets were mixed Friday, ending the week with modest declines, as a generally strong slate of economic and housing data propelled inflation expectations and interest rates to mid-pandemic highs. Ending the week with declines of 0.7%, the S&P 500 ETF (SPY) finished lower by 0.2% today while the Dow Jones Industrial Average (DIA) was higher by a point. Mid-Caps (MDY) and Small-Caps (SLY) each rallied more than 1.5% today, however, to finish essentially even with the large-cap indexes on the week. Real estate equities were broadly higher today following another wave of dividend boosts and solid earnings reports as the broad-based Equity REIT ETFs (VNQ) finished higher by 0.6% with 17-of-19 property sectors in positive territory while the Mortgage REIT ETFs (REM) rallied nearly 3%.

The economically-sensitive GICS equity sectors rallied today as the Materials (XLB), Energy (XLE), and Industrials (XLI) led to the upside. The 10-Year Treasury Yield (IEF) climbed to the highest level since last March after PMI data in the U.S. and Europe topped estimates while Existing Home Sales also showed continued strength behind the housing-led recovery, lifting homebuilders and the broader Hoya Capital Housing Index to solid gains. We'll publish a full analysis and commentary of this week's developments in the real estate industry including more than 50 REIT earnings reports, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

On that point, the National Association of Realtors reported this morning that Existing Home Sales were stronger-than-expected in January, rising 0.6% from last month and were 23.7% from the prior year. The median existing-home sales price rose to $303,900, 14.1% higher from one year ago. First-time buyers were responsible for 33% of sales in January, up from 31% in December 2020 and from 32% in January 2020. The positive momentum has shown few signs of slowing, according to data from Redfin (RDFN), which reported today that its measure of home sales were 20% higher in January, the third-highest gain on record since at least 2013.

One of the emerging constraints on the further upside for New and Existing Home Sales is the simple lack of homes available to sell as homebuilders - along with materials providers along the value chain including Timber REITs - scramble to meet the insatiable demand. On the existing sales side, the NAR reported that housing inventory fell to a record-low of 1.04 million units, down by 25.7% year-over-year – a record decline. Properties remained on the market for just 21 days in January, a historically low rate, while the months supply at the current sales pace stood at just 1.9 months, also at historic lows. Some much-needed supply is on the way, but not nearly enough to equalize the supply/demand imbalance as total housing starts rose 7.8% in 2020.

Real Estate Earnings Update

The wave of dividend boosts across the REIT sector continued over the last 24 hours as two more equity REITs and two mortgage REITs raised their payouts as discussed in REIT Earnings Halftime Report: Dividend Revival. ExtraSpace (EXR) boosted its dividend to $1.00/share, an 11.1% increase from its prior dividend of $0.90. Urban Edge (UE) reinstated its dividend at $0.15/share, obviously above its prior rate of $0.0, but below its pre-pandemic dividend of $0.22 declared. Earlier in the week, Medical Properties (MPW), Essex Properties (ESS), and RPT Realty (RPT) each boosted their payouts as well, bringing the 2021 total to 23.

Net Lease: Spirit Realty (SRC) finished higher nearly 5% after reporting this morning that it sees its AFFO/share bouncing back in 2021 with 3.4% growth following the 11.7% decline in 2020, which was the third straight year of double-digit-percentage AFFO/share declines. Agree Realty (ADC) lower higher by about 1% after reporting yesterday afternoon that it ended 2020 with full-year AFFO/share growth of 6.0%, one of the only net lease REITs to report positive growth. Fueling this growth has been external acquisitions as ADC remains one of the few net lease REITs that remained in "growth mode" throughout the pandemic. ADC acquired $300m in additional assets in 2020 and sees net asset growth of $850m in 2021 at the midpoint of its guidance.

Hotels: Host Hotels (HST) finished higher by 4.2% after reporting yesterday afternoon that it expects its hotel portfolio to return to profitability in the aggregate sometime during H2 2021 based on hotel level EBITDA. HST noted positive trends in January in group bookings, but saw its occupancy rate improve only marginally in Q4 compared to Q3 to 19.4%. According to TSA Checkpoint data, airline travel bottomed in early April at just 4% of its prior-year, and after recovering to just shy of 50% during the Christmas holiday season, the last two months have trended sideways suggesting that Q1 won't be too much better than Q4 for hotel REITs.

Industrial: Americold (COLD) finished higher by 4.0% after reporting yesterday afternoon that recorded full-year AFFO/share growth of 10.3% and sees another impressive year of 9.3% growth in 2021 at the midpoint of its guidance range. COLD recorded same-store NOI growth of 4.0% in 2020 and sees a continued acceleration to 4.5% growth in 2021 as fundamentals across the industrial space - including COLD's nice of temperature-controlled logistics space - reman as strong as any REIT sector.

Manufactured Housing: On Wednesday, Sun Communities (SUI) reported another strong quarter as the manufactured housing sector continues to feel the tailwinds from the mounting shortage of affordable housing. SUI reported that its FFO/share rose by 3.5% in 2020 - a deceleration from its nearly 9% average growth over the prior four years - but expects to get it all back in 2021 as FFO is expected to surge by more than 15%. Results for both SUI and Equity Lifestyle (ELS) were negatively impacted by shutdowns in their RV parks during the peak of the pandemic while occupancy rates in their manufactured housing facilities remain at historic highs.

Healthcare: On Wednesday, Ventas (VTR) reported a mixed quarter as the senior housing segment remains under intense pressure from the pandemic. VTR recorded same-store NOI growth of -11.8% in Q4 compared to last year with its Senior Housing Operating ("SHOP") portfolio declining by -24.7%, partially offset by 2.9% growth in its medical office segment. Sequentially, however, NOI rose 4.4% from the prior quarter with its SHOP portfolio rising 13.4%. Forward guidance indicates that SHOP will continue to see occupancy declines in Q1, but the company commented that "Leading indicators and demand are again showing strength, with leads in January at the highest level since the beginning of the pandemic."

We're now on the home stretch of another newsworthy REIT earnings season. Results thus far have generally been better than expected as dividend cuts have given way to dividend boosts. 23 equity REITs have now boosted their dividend this year, the majority of which were among the 52 REITs that increased their dividend last year. Rent collection - and interest collection for mREITs - has recovered to "normalized" levels across all major property sectors outside of retail. The final stretch of earnings season could bring more fireworks as many of the more-troubled REITs have yet to report results.

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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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