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  • Alex Pettee, CFA

Retail Rebound • Inflation Concern • REIT M&A

Summary

  • U.S. equity markets were lower Friday - snapping a three-week winning streak on the major averages - as strong retail sales data was offset by consumer confidence data showed mounting concern.

  • Pushing its weekly declines to roughly 1%, the S&P 500 finished lower by 0.8% today while the Mid-Cap 400 retreated 1.2% and the Small-Cap 600 declined by 0.8%.

  • Real estate equities were among the strongest-performing sectors this week, but the Equity REIT Index finished lower by 0.1% today with 10-of-19 property sectors in negative territory.

  • Shopping center REIT Retail Value (RVI) announced it reached a deal to sell its remaining assets in Puerto Rico for $550M in cash while Weingarten (WRI) announced a special dividend as part of its pending merger with Kimco (KIM).

  • Retail Sales were slightly stronger-than-expected in June as spending improved in many of the most COVID-impacted categories including malls, restaurants, and clothing retailers.

Real Estate Daily Recap

U.S. equity markets were lower Friday - snapping a three-week winning streak on the major averages - as strong retail sales data was offset by consumer confidence data showed mounting concern over inflation. Pushing its weekly declines to roughly 1%, the S&P 500 finished lower by 0.8% today while the Mid-Cap 400 retreated 1.2% and the Small-Cap 600 declined by 0.8%, pushing their respective week-to-date declines to roughly 3.5% and 4.5%. Real estate equities were among the strongest-performing sectors this week, but the Equity REIT Index finished lower by 0.1% today with 10-of-19 property sectors in negative territory while Mortgage REITs declined 0.5%.

Equity markets erased early-sessions gains after Consumer Sentiment data fell well shy of estimates, declining to five month lows pressured by concerns over rising inflation as consumers now expect inflation to rise 4.8% over the next year, the highest since August 2008. Seven of the eleven GICS equity sectors finished lower on the day, dragged on the downside by the economically-sensitive Energy (XLE) and Materials (XLB) sectors. 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.

The Commerce Department reported this morning that Retail Sales were slightly stronger-than-expected in June as spending improved in many of the most COVID-impacted categories including malls, restaurants, and clothing retailers. Sales climbed 0.6% from the downwardly-revised rate in May and were 18.0% higher than June of last year. June was the third-strongest month on record behind March and April of this year as the effects of the unprecedented levels of fiscal stimulus in late 2020 and early 2021 continue to be felt with more "juice left in the tank" as the personal savings rate of 12.4% remains nearly twice as high as the pre-pandemic level of around 7%.

Commercial Equity REITs

Shopping Center: Retail Value (RVI) announced it reached a deal to sell its remaining assets in Puerto Rico to Kildare Acquisitions US for $550M in cash, a deal that is expected to close by the end of Q3 2021. Elsewhere in the shopping center sector, Weingarten Realty (WRI) declared a special cash distribution of $0.69 per common share in connection with the anticipated merger of WRI into Kimco Realty (KIM) expected to close on August 3rd, and to satisfy the REIT taxable income distribution requirements. The special distribution adjusts the cash consideration to be paid by Kimco at the closing of the merger from $2.89 per share to $2.20 per share, and does not affect the payment of the share consideration of 1.408 newly issued shares of common stock of Kimco for each WRI common share.

Hotel: Ryman Hospitality (RHP) was among the leaders today after providing a business update in which it noted that it turned cash flow positive in June, citing strong trends in group demand. RHP noted that its cash burn was -$10.8M in April, -$7.6M in May, and turned positive cash flow of $15.1M in June. The latest TSA Checkpoint data showed that domestic travel - which bottomed last April at less than 5% of pre-pandemic levels - recovered to 80% last week while several days in early July - boosted by the July 4th holiday - saw air travel above 2019 levels.

Storage: Yesterday, we published Storage Wars. Self-Storage REITs have delivered as impressive of a turnaround as any property sector in recent memory, catalyzed by the ongoing housing boom and the acceleration in housing market turnover. An ensemble of impressive earnings results indicated that the pandemic-driven rebound was no fluke. Storage REITs now project to have one of the strongest growth rates of any sector this year. Storage demand is driven by "change", and there has been no shortage of that recently as post-pandemic mobility rates normalize. The demographic-driven housing boom bodes well for a sustained recovery into the mid-2020s.


Industrial: Earlier this week, we published Industrial REITs: Who Doesn't Love Logistics? The red-hot industrial property market - the physical "hub" of e-commerce - has shown few signs of cooling down through mid-2021 as businesses scramble to build out supply chain resiliency. Industrial REITs - which recorded the strongest earnings and dividend growth of any real estate sector in 2020 - continue to thrive amid this insatiable demand for logistics space. Brokerage firm CBRE (CBRE) reported that industrial vacancy rates dipped to record-lows last quarter - the 44th consecutive quarter of positive net absorption - driving a nearly double-digit surge in rents. Sharing similar compelling tailwinds as the U.S. housing industry - structurally constrained supply and robust secular demand - we expect that investors willing to "pay up for quality" won't be disappointed.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.1% today and ended the week with 4.6% declines. Commercial mREITs declined 0.3% today to push its weekly decline to 1.2%. Ellington Financial (EFC) was among the leaders today after it announced that its estimated book value per common share ("BVPS") was $18.47 as of June 30, 2021 up 1.3% from the end of May and up roughly 2% from its BVPS at the end of Q1.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.17% today, on average, but outperformed their respective common stock issues by an average of 0.75%. VEREIT (VER) announced that it will redeem all of its 6.70% Series F Cumulative Preferred (VER.PF) - its only outstanding preferred issue - on Aug. 15, 2021. DigitalBridge (DBRG) announced that it will redeem all of its 7.500% Series G Preferred (DBRG.PG). Ready Capital (RC) completed the previously announced redemption of its 8.625% Series B Preferred (RC.PB) and 7.625% Series D Preferred (RC.PD).

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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