Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Sell-Off Intensifies, Spreads To REITs [Daily Recap]

  • The sell-off intensified on Tuesday for U.S. equity markets amid escalating concerns over the coronavirus outbreak as the major indexes wiped out their gains for the year.

  • Following 3% declines yesterday, the S&P 500 finished lower by another 3.0% today while the Dow Jones Industrial Average dipped by more than 875 points after sliding 1,000 points yesterday.

  • The 10-Year Treasury Yield dipped to a historic intra-day low below the previous 2016-lows of 1.32% as investors begin to price in a more aggressive monetary policy response.

  • Not even the domestic-focused real estate sector could escape the contagion today as the broad-based commercial Real Estate ETF (VNQ) finished lower by 2.7%, but still delivering another day of relative outperformance.

  • Lost in the contagion fears were strong earnings from Home Depot and residential brokerage firm Realogy, each citing strengthening fundamentals in the US housing market.

Real Estate Daily Recap

The sell-off intensified on Tuesday for U.S. equity markets amid escalating concerns over the coronavirus outbreak as the major indexes wiped out their gains for the year. Following 3% declines yesterday, the S&P 500 ETF (SPY) finished lower by another 3.0% today while the Dow Jones Industrial Average (DIA) dipped by more than 875 points after 1,000 point losses yesterday. The 10-Year Treasury Yield (IEF) dipped to a historic intra-day low below the previous 2016-lows of 1.32% as investors begin to price in a more aggressive monetary policy response from the Federal Reserve. Not even the domestic-focused real estate sector could escape the contagion today as the broad-based commercial Real Estate ETF (VNQ) finished lower by 2.7%, but still delivering another day of relative outperformance.

A sell-off from the recently high-flying single-family homebuilding sector weighed on the Hoya Capital Housing Index, the benchmark that tracks the performance of the US Housing Industry, despite additional signs of underlying housing market strength. Realogy (RLGY) was one of few stocks in the green today after the brokerage firm reported very strong earnings results, citing "improving fundamentals across the housing market" and low mortgage rates which are "expected to remain a tailwind for the industry throughout 2020." Home improvement retailer Home Depot (HD), the largest component in the housing index, was a source of relative strength today as well after reporting strong fourth-quarter results with comparable sales up 5.3%. On the data front, home price data this morning from Case Shiller and the FHFA showed a continued reacceleration in home values, driven by strong demographic-driven demand and lower mortgage rates.

Taking a step back and looking at the sector performance on a year-to-date basis, we see that the Utilities (XLU), Communications (XLC), and Real Estate (VNQ) ETFs have been the top-performing sectors this year while the Energy (XLE), Materials (XLB), and Financials (XLF) have been laggards. For the year, commercial REITs are higher by 3.0% and residential real estate stocks are higher by 1.2%, each delivering solid outperformance compared to the 2.9% declines from the S&P 500. REITs delivered their second-best year of the decade in 2019, delivering a total return of nearly 29% compared to the 31% total returns from the S&P 500.

All eighteen REIT sectors were in negative territory for the day, buoyed on the upside by the manufactured housing and cell tower REIT sector. Cell tower REIT American Tower (AMT) was a leader after posting better-than-expected results last quarter, capping off another strong year in which U.S. organic tenant billings (effectively same-store NOI) grew more than 7% and as the firm added 14,000 communications sites. National Storage Affiliates (NSA) was also a solid outperformer after reporting results yesterday afternoon, achievings strong same-store NOI growth of 5.0% in 2019, tops in the self-storage sector. Net lease REITs Spirit Realty (SRC) and EPR Properties (EPR) each reported generally in-line results yesterday afternoon.

The tourism-senstive hotel REITs and politically-sensitive prison REITs dragged on the downside today. Hersha Hospitality (HT) was among the biggest laggards after the hotel REIT missed on fourth-quarter earnings with comparable-hotel revPAR falling 1.4% year-over-year and forecast guidance on the soft-side. Small-cap apartment REIT Preferred Apartments (APTS) slide more than 11% as investors remain skeptical on their internalization plans despite a solid quarter of property-level fundamentals, consistent with rental strength reported by the major apartment REITs.

Reporting after the close today includes billboard REIT Outfront (OUT), storage REIT Public Storage (PSA), healthcare REIT Community Healthcare (CHCT), and mall REIT Pennsylvania REIT (PEI), among others. Our Real Estate Earnings Preview compiled the notable earnings that we're watching across the residential and commercial real estate sectors. We'll have additional coverage on iREIT on Alpha as well as our Real Estate Weekly Outlook.


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