Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

REITs Rebound | Malls Go Bust | Decision Time

  • Ahead of Election Day tomorrow, U.S. equity markets bounced back Monday as better-than-expected economic data and tightening poll numbers offset concerns over the cascading wave of lockdowns sweeping across Europe.

  • After dipping more than 5% last week, the S&P 500 finished higher by 1.2% today and the Dow Jones Industrial Average jumped by 423 points despite weakness from large-cap technology firms.

  • Real estate equities were among the leaders today ahead of another busy week of earnings. The broad-based Equity REIT ETFs finished higher by 2.3% with all property sectors in positive-territory.

  • Troubled mall REITs Pennsylvania REIT (PEI) and CBL & Associates (CBL) each filed for Chapter 11 bankruptcy protection over the weekend. Having entered the pandemic already in an already precarious financial situation, the pandemic has finally pushed these REITs off the edge.

  • It'll be another busy afternoon of REIT Earnings, headlined by Realty Income (O), Healthpeak (PEAK), and SBA Communications (SBAC). We'll update this report throughout the afternoon with real-time commentary.

Real Estate Daily Recap

Ahead of Election Day tomorrow, U.S. equity markets bounced back Monday as better-than-expected economic data and tightening poll numbers in the U.S. offset concerns over the cascading wave of lockdowns sweeping across Europe. After dipping more than 5% last week, the S&P 500 ETF (SPY) finished higher by 1.2% today and the Dow Jones Industrial Average (DIA) jumped by nearly 400 points despite continued weakness from large-cap technology firms. Real estate equities were among the leaders today ahead of another busy week of earnings as the broad-based Equity REIT ETF (VNQ) finished higher by 2.3% today with all property sectors in positive territory while the Mortgage REIT ETF (REM) finished higher by 2.3%.

Heading into Election Day, polling averages in key battleground states have continued to tighten over the past week with former VP Joe Biden holding a 2.7% edge over President Trump in the RCP Top Battleground average. In 2016, President Trump outperformed the RCP Battleground average by a wider margin - 2.8% - en route to a 304-227 electoral vote victory. Betting markets currently assign a roughly 65% implied probability of a Biden victory and an 85% probability of Democrat house control, but see the U.S. Senate majority as a pick 'em. As a broad generalization, the market appears to see Democrat outperformance as positive for technology stocks and sectors with low effective corporate tax rates while Republican outperformance is viewed as positive for domestic-focused sectors, regulation-sensitive sectors (energy, industrial, materials), and those with higher effective tax rates.

That appears to be consistent with the trend we observed in the sector performance patterns today as a slight uptick in the outlook for Republicans lifted the economically-sensitive Energy (XLE), Materials (XLB), and Industrials (XLI) to a strong day while the Technology (XLK) and Communications (XLC) sector lagged. As discussed in our Real Estate Weekly Outlook, investors seemed to overlook a strong slate of economic data last week amid concerns over the reimposition of European lockdowns, a trend that continued today as ISM Manufacturing PMI data topped estimates and rose to the strongest level in two years. Homebuilders and the broader Hoya Capital Housing Index also rebounded after a rough week with strong gains today.

While it will surely take a backseat in the headlines to the U.S. elections on Tuesday, employment data highlights next week's busy 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 600k in September following last month's gain of 661k and for the unemployment rate to tick down to 7.6%. We'll also see Construction Spending data on Monday, the Federal Reserve interest rate decision and press conference on Thursday, and a flurry of PMI data throughout the week.

Commercial Equity REITs

Last week, we published our REIT Earnings Halftime Report: Dividend Cuts, No More. We're at the halfway-point of another newsworthy REIT earnings season. Results thus far have been better-than-expected as dividend cuts have given way to dividend boosts. After 63 equity REITs and 32 mortgage REITs cut dividends in Q2, just three REITs have announced a reduction since then while 39 REITs have raised dividends above pre-pandemic rates. Amid the pandemic, the "essential" property sectors - housing, technology, and e-commerce/industrial - have actually become stronger, perhaps at the expense of non-essential property sectors. We recap the notable earnings reports over the last 24 hours below.

Malls: Here are the fireworks we've been waiting for: troubled mall REITs Pennsylvania REIT (PEI) and CBL & Associates (CBL) each filed for Chapter 11 bankruptcy protection over the weekend. Having entered the pandemic already in an already precarious financial situation, rent collection rates below 50% in Q2 - the worst in the REIT sector - has pushed these troubled REITs over the edge. For PEI, which ended the day essentially flat, the filing is a continuation of its previously-announced restructuring plan that began in mid-October while CBL's filing is an extension of an agreement reached with debt holders announced in mid-August. In CBL's filing, the firm did note that rent collection has improved from an initial low of 27% in April to around 70% in Q3, excluding the collection of late rents. In total, CBL has collected 68% of rents from April through September. 

Net Lease: National Retail (NNN) finished higher by 4.3% today after it reported this morning that it collected roughly 90% of rent originally due for Q3 and 94% of rent due in October. While most tenants are now paying 100% of rents, rent collection from theater tenants (33% collection rate) continues to drag results while limited-service restaurants (76%), health/fitness (85%), and family entertainment (85%) are also lagging. Through nine months of 2020, AFFO per share is lower by 13.4%. This afternoon, Realty Income (O) reported that it collected 93% of rents in Q3 and in October and increased its 2020 acquisition guidance. Through nine months, its AFFO per share is higher by 3.7%. Spirit Realty (SRC) reported this afternoon that it collected 90% of Q3 rents and 93% of October rents and also boosted its acquisition guidance. Through nine months, SRC's AFFO per share is lower by 14.7% from 2019.

Casinos: MGM Growth Properties (MGP) finished higher by 2.6% after reporting this morning that it continues to collect 100% of tenants. MGP's FFO per share came in ahead of estimates but was still lower by 3.4% from 3Q19. A surprising leader in the REIT sector throughout the pandemic, casino REITs continue to report near-perfect rent collection despite the intense challenges faced by their tenants. Last week, VICI Properties (OTC:VICI), which raised its dividend above pre-pandemic rates earlier this year, beat on the top and bottom line in the third quarter, underscored by a 22.9% year-over-year increase in AFFO per share in Q3 as rent collection remains perfect. Gaming & Leisure Properties (GLPI) reported that it collected 99% of rents as 45 out of their 46 properties are now open. 

Shopping CentersRetail Properties of America (RPAI) reported this afternoon that it collected 84% of Q3 rents and 87% of October rents. Same-store NOI growth was lower by 12.4% from last year, an improvement from its Q2 rate of -22.2%. We've now heard results from seven of the seventeen REITs in the sector. As expected, rent collection has rebounded to around 90% by the end of Q3 led by Kite Realty (KRG), Whitestone REIT (WSR), and Retail Opportunities (ROIC). Same-store NOI growth - which declined by an average of nearly 18% in Q2, has become "less bad" but is still not pretty with average reported declines of 9.1% thus far. The thirteen shopping center REITs that cut their dividend early in the pandemic are likely to be among the last to resume payouts, as ROIC noted that it won't resume its dividend until early 2021. The major reports next week will be Regency Centers (REG), Federal Realty (FRT), and Kimco (KIM).

Apartments:  Investors Real Estate (IRET) reported this afternoon that it collected 98.8% of rents in Q3 and saw improving occupancy rates. The Midwest-focused REIT recorded same-store and leasing metrics that were roughly in-line with our estimates with modest growth in same-store revenues and a slight dip in NOI growth while rental rates were essentially flat. The "urban exodus" theme has been on full display this quarter as apartment REIT properties in the "shutdown cities" - NYC, L.A., Chicago, and San Francisco – have seen residents flee to lower-cost and safer suburban markets and more business-friendly Sunbelt metros. While rent collection remains strong at roughly 97-98%, rental rates and occupancy dipped considerably in urban markets underscored by dismal rent growth results by Equity Residential (EQR), AvalonBay (AVB), and Aimco (AIV). Sunbelt-focused REITs including Mid-America (MAA) continue to see positive rent growth.

Healthcare: Healthpeak (PEAK) reported this afternoon that same-store NOI growth rose 2.8% from last year, a sharp rebound from the 2.2% decline in Q2. PEAK saw NOI rise 3.3% in their medical office portfolio and 5.5% in their life science portfolio. The senior housing segment recorded a 6.3% decline, but this was a sharp improvement from the -21.2% decline last quarter. PEAK continues to diversify away from the senior housing sub-sector and is in various stages on the sales of more than $4B of senior housing properties.  

Cell Towers: SBA Communications (SBAC) rounded out cell tower REIT earnings season this afternoon with strong results. CCI raised full-year guidance across the board as the REIT now sees AFFO per share growth of 10.7% this year, up from 7.7% in the prior guidance. Last week, American Tower (AMT), reported a better-than-expected third quarter, boosting guidance across the board with AFFO per share now expected to rise by 6.3% in 2020. Crown Castle (CCI) boosted its dividend by 11% but lowered its full-year outlook for revenue growth. We continue to see Apple's (AAPL) iPhone 12 launch as the true "arrival" of 5G, the much-anticipated next-generation mobile network.

Office: Easterly Government (DEA) gained 2.8% after reporting that it continues to collect all of their rent from their government tenants and boosted its 2020 guidance. It sees 5.9% FFO growth in 2020 and 3.2% growth next year. Douglas Emmett (DEI) reports results this afternoon. We've seen a clear urban vs. suburban effect at play in the office sector this quarter. We believe that Suburban and Sunbelt office assets are likely to see far stronger demand than urban markets over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival."

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 3.0% today after ending last week lower by 5.3%. Commercial mREITs gained 2.9% today after ending last week lower by 3.0%. Eight of the twenty-three residential mREITs have now reported results, and so far, Book Values have climbed by an average of 5.7%, shy of our estimates for a 10-15% improvement. Seven of the nineteen commercial mREITs have reported results, and so far, BVs have risen by an average of 1.9%, also shy of our estimates of a 5% improvement.

Tomorrow, we'll see results from Tremont Mortgage (TRMT), iStar (STAR), and Anworth Mortgage (ANH). Last week, we published our Mortgage REIT Earnings Preview. Mortgage REITs took center-stage during the early stages of the pandemic as financial market instability violently shook the mREIT sector to the core with mind-numbing declines of more than 70%. Buoyed by a suddenly red-hot U.S. housing market, residential mREITs have rallied back from the brink over the last two quarters and have nearly doubled in value from their lows. The 3 trends we're watching this earnings season: 1) Dividend resumptions, 2) Updated book values, and 3) Macroeconomic commentary.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 0.07% today, on average, and underperformed their respective common stock issues by an average of 2.21%. The preferred issues of CBL & Associates (CBL) and Pennsylvania REIT (PEI) were among the weakest performers amid the aforementioned bankruptcy filings. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.78% higher in 2020 than their respective common shares.


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