• Alex Pettee, CFA

September Slump • Quarter Recap • Shutdown Averted

Summary

  • U.S. equity markets finished sharply lower Thursday, finishing September with their worst monthly declines since March 2020, as concerns over inflation, moderating growth, and political dysfunction weighed on sentiment.

  • Posting monthly declines of nearly 5% in September, the S&P 500 slipped 1.1% today while the Mid-Cap 400 finished lower by 1.4% and the Small-Cap 600 declined 1.1%.

  • Real estate equities were lower today - but are still outperformers on the week - as the Equity REIT Index retreated by 1.7% today with 18-of-19 property sectors in negative territory.

  • REITs were essentially flat, on average, in the third quarter, declining by 0.7% on a price-return basis. Housing-related categories led the way in Q3 including apartments, manufactured housing, and timber REITs.

  • Billboard and prison REITs also delivered a strong Q3. Laggards in the third quarter included office, cell tower, and net lease REITs, but all nineteen REIT sectors remain in positive territory for the year.

Real Estate Daily Recap

U.S. equity markets finished sharply lower Thursday, finishing September with their worst monthly declines since March 2020, as concerns over inflation, moderating growth, and political dysfunction weighed on sentiment. Posting monthly declines of nearly 5% in September, the S&P 500 slipped 1.1% today while the Mid-Cap 400 finished lower by 1.4% and the Small-Cap 600 declined 1.1%. Real estate equities were lower today - but are still outperformers on the week - as the Equity REIT Index retreated by 1.7% today with 18-of-19 property sectors in negative territory while Mortgage REITs pulled back 0.4%.

Equity markets retreated from early-session gains on disappointing jobless claims data that showed that applications for unemployment benefits rose for a third straight week, led by another surge in California. The passage of a stop-gap bill to extended government funding through December 3 was met by a lukewarm market response as investors anticipate ongoing political difficultly in a separate battle over the debt ceiling and a massive $3.5 trillion tax-and-spending plan. All eleven GICS equity sectors were lower on the day and all sectors besides Energy (XLE) are lower by at least 1.8% on the week.

Equity REITs

REITs were essentially flat, on average, in the third quarter, declining by 0.7% on a price-return basis. Among the major REIT sectors, housing-related categories led the way in Q3 including apartments, manufactured housing, and timber REITs. Laggards in the third quarter included office, cell tower, and net lease REITs. Through three quarters of 2021, Equity REITs are now higher by 19.8% this year while Mortgage REITs have gained 14.1%. This compares with the 14.8% advance on the S&P 500 and the 19.6% gain on the S&P Mid-Cap 400. Led by the residential and retail property sectors, all nineteen REIT sectors remain in positive territory for the year with regional malls and cannabis RIETs leading to the upside.

Hotels: This afternoon, we will publish an updated report on the Hotel REIT sector. Recent TSA data showed that domestic travel recovered 80% of pre-pandemic levels in early July, but have slumped over the last two months amid the resurgence of the COVID delta variant. Following a brisk post-vaccine share price recovery, hotel REITs and the broader hospitality industry have stalled over the six months amid these renewed concerns over COVID variants abroad. While we've seen a nearly full recovery in domestic leisure travel, international tourism will likely remain depressed for an extended period, while the return of business travel remains a significant wild-card. We continue to see risks are skewed to the downside for the hospitality industry.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly lower today as commercial mREITs declined by 0.8% and are now lower by 2.1% on the week. Residential mREITs declined by 0.4% and are now lower by 1.5% this week. Through three quarters of 2021, 26 of the 41 mREITs are in positive territory for the year, led to the upside by iStar (STAR), Redwood Trust (RWT), and Chimera (CIM), which have all gained more than 40% in 2021. Boosted by 24 dividend hikes across the sector this year, the average residential mortgage REIT now pays a dividend yield of 9.1% while the average commercial mortgage REIT pays a dividend yield of 7.0%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.05% today, on average, and have produced total returns this year of roughly 15%. Over in the bond markets today, cell tower REIT American Tower (AMT) priced €500.0M of 0.40% senior unsecured notes due 2027 and €500.0M of 0.95% senior unsecured notes due 2030. Shopping center REIT Phillips Edison (PECO) priced $350 million of 2.625% senior notes due 2031.

Economic Data This Week

The busy week of economic data continues on Friday with the PCE Price Index - the Fed's "preferred" measure of consumer inflation - which is expected to show another month of above-4% annual inflation in August. 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: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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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