• Alex Pettee, CFA

Shoppers Spend • REIT Buys • Fixer Upper

Summary

  • U.S. equity markets advanced Tuesday following better-than-expected retail sales and housing market data, consumer-led strength that was echoed by strong earnings results from Home Depot and Walmart.

  • Following fractional declines yesterday, the S&P 500 advanced 0.4% today while the Mid-Cap 400 gained 0.2% and the Small-Cap 600 finished higher by 0.3%. REITs slipped 0.7%.

  • Homebuilder confidence jumped in November, rising 3 points to 83 to a six-month high as accelerating home buyer demand offset ongoing supply chain headwinds as buyer traffic rose to five-month-highs.

  • Fixer Upper: Consistent with these signs of continued housing market momentum, Home Depot (HD) rallied nearly 6% today after reporting better-than-expected earnings results with comparable sales rising 6.1%.

  • Sun Communities (SUI) rallied more than 3.5% today after it announced a $1.3B acquisition of Park Holidays UK. CubeSmart (CUBE) dipped 3% after it announced a $1.69B acquisition of Storage West.

Income Builder Daily Recap

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U.S. equity markets advanced Tuesday following better-than-expected retail sales and housing market data, consumer-led strength that was echoed by strong earnings results from Home Depot and Walmart. Following fractional declines yesterday, the S&P 500 advanced 0.4% today while the Mid-Cap 400 gained 0.2% and the Small-Cap 600 finished higher by 0.3%. Real estate equities - with the exception of housing-related segments - were laggards today as the Equity REIT Index declined 0.7% today with 4-of-19 property sectors in positive territory while Mortgage REITs slipped 0.7%.

The NAHB reported today that homebuilder confidence jumped in November, rising 3 points to 83 to a six-month high as accelerating home buyer demand offset ongoing supply chain headwinds. Powering the gains in the headline index, the sub-index for current single-family home sales rose to the highest since February, while the index of prospective buyer traffic increased to a five-month high. Last month in Shortages Everywhere, we discussed how surging rents - and a desire for an inflation-hedging asset - have again sparked recent demand. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates and given recent signs of a late-year reacceleration in demand.

Consistent with these signs of continued housing market momentum, Home Depot (HD) rallied nearly 6% today after reporting better-than-expected earnings results with comparable sales rising 6.1% - well above consensus of 2.2% - with comparable sales in the U.S. rising 5.5% versus 0.9% consensus. Average ticket up by 12.9% to $82.38 during the quarter while total transactions - powering a 125 basis point in gross margins from last year to 15.7% - as higher prices more-than-offset rising costs. On the earnings call, HD did not raise concern about supply chain or cost headwinds, but did highlight the continued strength they observe across the U.S. housing market.

Equity REIT Daily Recap

Manufactured Housing: Sun Communities (SUI) rallied more than 3.5% today after it announced a $1.3B acquisition of Park Holidays UK, which is the second-largest owner of RV and Manufactured Housing parks in the UK with 40 communities. The acquisition is expected to be accretive to 2022 Core FFO/share and will represent 7% of the Company’s properties. SUI has proven to be as skilled as any REIT on the external growth-front, and we have no reason to doubt that the team sees opportunity via international expansion.It does seem to confirm that between SUI, ELS, and UMH, there simply aren’t too many investment-grade MH or RV parks left to scoop-up in the U.S. – and hence, the recent focus on analogous asset classes like boat marinas.

Self-Storage: Separately, self-storage REIT CubeSmart (CUBE) dipped 3% after it announced a $1.69B acquisition of Storage West - an owner and operator of 59 self-storage assets in Southern California (22), Phoenix (17), Las Vegas (13), and Houston (7). The Company expects to finance the deal – which is expected to close in the fourth quarter of 2021 - through a combination of a secondary stock offering and new long-term debt financing. The deal is the second-largest storage deal of the past couple years behind Public Storage’s $1.8B acquisition earlier this year of ezStorage.

Data Center: Yesterday, we published Data Center REITs: Merger Mania exclusively on Income Builder. The Data Center REIT sector has been substantially and rapidly transformed as the three largest data center portfolio acquisitions in history have been announced in just the past several months. We predicted an impending M&A boom, but expected Digital Realty (DLR) and Equinix (EQIX) to scoop-up their smaller peers. Instead, CyrusOne (CONE) and QTS have been taken private while American Tower (AMT) acquired CoreSite (COR) The lack of serious interest from DLR and EQIX - which are sitting on a mountain of dry powder - suggests that these REITs are working on a major M&A deal of their own and a mega-merger between the two isn't outside the realm of possibility.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential mREITs slipped 1.2% today while commercial mREITs ended lower by 0.5%. Ellington Financial (EFC) finished lower by 0.6% after providing an estimated Book Value Per Share ("BVPS") of $18.35 as of October 31, 2021, roughly flat compared to the end of Q3. AG Mortgage (MITT) dipped nearly 10% after launching a 7M share secondary offering of its common stock and plans to use the proceeds to acquire four newly originated non-agency residential mortgage loan pools totaling $530.7M. The average residential mortgage REIT now pays a dividend yield of 9.12% while the average commercial mortgage REIT pays a dividend yield of 6.14%.

Economic Data This Week

The busy week of economic data continues on Wednesday when we'll see Housing Starts and Building Permits data for October which is expected to show that construction activity accelerated modestly last month as supply chain constraints slowly ease at the margins.



We're excited to announce the launch of our new investment research service here on Seeking Alpha - Hoya Capital Income Builder. We've put together a great team of contributors from across the REIT, dividend, and ETF industry, so whether your focus is High Yield or Dividend Growth, we’ve got you covered with high-quality, actionable investment research and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%. And of course, subscribers receive complete access to our investment research - including reports that are never published elsewhere - from Hoya Capital and our team of contributors.

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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