Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Retail Surprise | REITs Lag | Vaccine Hope

Daily Recap

  • U.S. equity markets finished mostly lower Friday despite better-than-expected retail sales data this morning, which was offset by continued pressure on technology stocks amid a deepening censorship controversy.

  • Ending the week higher by 0.1%, the S&P 500 finished fractionally higher on the day while the tech-heavy Nasdaq 100 dipped 0.6% and the Dow Jones Industrial Average gained 112 points.

  • Finishing the week off by nearly 3%, the broad-based Equity REIT ETF (VNQ) finished lower by 0.7% today with 16 of 18 property sectors in negative territory. Mortgage REIT dipped 0.9%.

  • Retail sales were much stronger-than-expected in September, gaining for the fifth month in a row and setting new record-highs. Led by e-commerce and home improvement sales, total retail sales gained 1.9% from last month and 5.4% from the same month last year.

  • Investors also got a dose of positive vaccine news this morning as Pfizer (PFE) said it could be ready to apply for emergency-use authorization (EUA) of its COVID-19 vaccine by late November.

Real Estate Daily Recap

U.S. equity markets finished mostly lower Friday despite better-than-expected retail sales data this morning, which was offset by continued pressure on technology stocks amid a deepening censorship controversy. Ending the week higher by 0.1%, the S&P 500 ETF (SPY) finished fractionally higher on the day while the tech-heavy Nasdaq 100 (QQQ) dipped 0.6% and the Dow Jones Industrial Average (DIA) gained 112 points. REITs were under pressure this week ahead of the start of earnings season next Tuesday. Finishing the week off by nearly 3%, the broad-based Equity REIT ETF (VNQ) finished lower by 0.7% today with 16 of 18 property sectors in negative territory while the Mortgage REIT ETF (REM) dipped 0.9% on the day.

Investors also got a dose of positive vaccine news this morning as Pfizer (PFE) said it could be ready to apply for emergency-use authorization (EUA) of its COVID-19 vaccine by late November. 7 of the 11 GICS equity sectors finished in positive territory today, led by the Utilities (XLU), Healthcare (XLV), and Industrial (XLI) sectors. Homebuilders and the broader Hoya Capital Housing Index finished lower today but held onto gains for the week ahead of a jam-packed week of housing data. We'll have a full recap of the reasons behind the REIT sell-off and an analysis of this week's slate of economic data in our Real Estate Weekly Outlook report published Saturday morning.

As it relates to an emerging V-shaped recovery, perhaps a "close second" to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic. Retail sales were much stronger-than-expected in September according to data from the US Census Bureau this morning, gaining for the fifth month in a row and setting new record-highs. Aided by the WWII-levels of fiscal stimulus over the last several months, retail sales gained 1.9% from last month and 5.4% from the same month last year. Naturally, e-commerce sales have led the charge this year with online sales now higher by nearly 24% from last year while brick-and-mortar sales rose 2.0% from last September.

Housing-related retail categories have seen a similar resurgence in recent months as the homebuilders themselves as the Building Materials category is second only to e-commerce as the top-performing retail category with a 19.1% higher sales rate than last year. As we've discussed for several months, the building materials category - which includes Home Depot (HD) and Lowe's (LOW) - has been a notable positive standout during the pandemic, reflecting the continued resilience of the housing sector and the fact that households have exhibited a propensity to prioritize investments in home improvement amid the "work-from-home" era.

Commercial Equity REITs It was a tough week for REITs ahead of the start of third-quarter earnings season next Tuesday, which kicks off with Prologis (PLD), Rexford (REXR), Agree Realty (ADC), and Equity Lifestyle (ELS). As with last quarter, earnings season will provide pivotal information on rent collection and future dividend plans in what will surely be another newsworthy and potentially volatile several weeks. Most REITs have now announced the date of their earnings release, which we've compiled below. (Note that REITs that have not yet reported an earnings release date are in italics with an estimated date based on past reports.)

This morning, Ventas (VTR) announced that its recently-formed Ventas Life Science and Healthcare Real Estate Fund - which VTR owns a 20% stake in - has acquired a life science portfolio in San Francisco for $1 billion. As discussed in Healthcare REITs: Signs of Life, Healthcare REITs have shown signs of life over the past quarter on stabilizing fundamentals and on hopes of the success of a potential vaccine. Despite being ground-zero of the coronavirus pandemic, rent collection among healthcare REITs was actually among the strongest in the real estate sector. Rent collection averaged 96% in April through August with near-perfect rent collection in the research/lab, medical office building, triple-net senior housing, and skilled nursing facilities.

Elsewhere around the REIT sector, Broadstone Net Lease (BNL) gained more than 1% today after it announced that it received 97.9% in the third quarter and 95.5% in the second quarter, up from its previously-reported rate of 93.9%. Meanwhile, Realty Income (O) finished modestly higher after it declared a $0.234/share monthly dividend, in line with its previous rate, which was increased earlier this year. We've now tracked 31 equity REITs in our universe of 170 REITs to raise their dividend in 2020 compared to 65 equity REITs that have reduced or suspended their dividend. 74 REITs have maintained payouts at prior levels.

Yesterday, we published Cell Tower REITs: 5G Is Here. Throughout the coronavirus pandemic, the high-flying cell tower sector has thrived. Cellular network usage has surged as businesses, schools, and individuals stay connected via virtual interaction. Apple's (AAPL) upcoming iPhone 12 launch represents the true "arrival" of 5G, the much-anticipated next-generation mobile network that promises to usher in a new era of technological innovation. Cell tower REITs - American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) - continue to benefit from favorable competitive positioning within the telecommunication sector. While these REITs are priced for perfection, low supply and high demand should translate into continued pricing power for cell tower REITs.

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 0.8% today and ended the week lower by 1.2%. Commercial mREITs declined 0.7% to also end the week lower by 1.2%. Redwood Trust (RWT) led to the upside today after it provided a business update in which it estimated that the fair value of its securities investment portfolio increased approximately 10% in Q3. Sachem Capital (SACH) gained 3.0% after it declared a $0.12/share quarterly dividend, in line with its previous reduced rate. Tremont Mortgage (TRMT) and Orchid Island Capital (ORC) also finished on the upside after declaring dividends yesterday afternoon in-line with prior rates. 

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. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates.

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 0.23% today, on average, but outperformed their respective common stock issues by an average of 0.99%. Digital Realty (DLR) called its Series G (DLR.PG) yesterday, an issue that was initially eligible to be called in April 2018. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.18% 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 We'll have a full recap of the reasons behind the REIT sell-off this week and an analysis of this week's slate of economic data in our Real Estate Weekly Outlook report published Saturday morning.

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