• Alex Pettee, CFA

'Staggering' Rent Growth • Yields Retreat • China Crackdown

Summary

  • U.S. equity markets finished mixed Tuesday with government bond yields retreating to the lowest levels since February following weaker-than-expected PMI data and concern over China's targeting of technology firm Didi Global.

  • Snapping a seven-day streak of gains, the S&P 500 finished lower by 0.2% while the Mid-Cap 400 declined by 1.2% and Small-Caps slid 1.5%.

  • Real estate equities were among the leaders today as the Equity REIT Index gained 0.7% with 12 of 19 property sectors in positive territory while Mortgage REITs declined 0.6%.

  • Apartment rents are soaring at the fastest pace on record, and fresh data this morning from Apartment List confirmed that the acceleration picked up pace into late June with rents increasing by 2.3%, pushing the year-to-date gains to a "staggering" 9.2%.

  • Ashford Hospitality (AHT) slid more than 35% today after providing a business updating and announcing a 1-for-10 reverse stock split that will be effective on July 16th. AHT reported that its RevPAR in June was down 37% compared to 2019 levels.

Real Estate Daily Recap

U.S. equity markets finished mixed Tuesday with government bond yields retreating to the lowest levels since February following weaker-than-expected PMI data and concern over China's targeting of technology firm Didi Global. Snapping a seven-day streak of gains, the S&P 500 finished lower by 0.2% while the Mid-Cap 400 declined by 1.2% and Small-Caps slid 1.5%. Real estate equities were among the leaders today as the Equity REIT Index gained 0.7% with 12 of 19 property sectors in positive territory while the Mortgage REIT Index finished lower by 0.6%.

As discussed in our Real Estate Weekly Outlook, despite the better-than-expected employment data last week and signs of continued upward inflationary pressure across housing and energy markets, the bid for sovereign bonds has been seemingly insatiable as the 10-Year Treasury Yield retreated to its lowest level since late February today. Crude Oil (CO1:COM) prices briefly climbed to the highest level since 2014 following the breakdown in OPEC+ talks over the weekend. Within the Hoya Capital Housing Index, strength from residential REITs offset pressure on homebuilders as fresh data this morning showed record-setting rent growth in June.

The economic calendar slows down a bit in the holiday-shortened week ahead. On Wednesday, we'll see Job Openings and Labor Turnover ("JOLTS") data for May. Last month, JOLTS data showed that job opening soared to record-highs of 9.3 million in April - higher than the total number of unemployed workers - as employers struggle to offer competitive wages relative to generous unemployment benefits offered by the state and federal government. We'll also be watching Jobless Claims data on Thursday and a flurry of Purchasing Managers' Index ("PMI") data throughout the week.

Commercial Equity REITs

Cannabis: Today we published High On Growth. Cannabis REITs are riding a seemingly never-ending 'high' since bursting onto the scene in the late 2010s, thriving in the murky and often contradictory regulatory framework of legalized marijuana. While still early in the evolution of the industry, we see emerging parallels with the casino industry where REITs have carved out a profitable and attractive niche with a sustainable competitive advantage. Critically, as additional states adopt tax and regulatory frameworks, marijuana cultivation licenses are increasingly "attached" to the real estate asset - and limited in quantity - an ideal structure for these REITs.


Apartments: As discussed in Rents Roar as Hiring Rebounds, apartment rents are soaring at the fastest levels on record, and fresh data this morning from Apartment List confirmed that the acceleration actually picked up pace into late June. The data provider noted that rents increased by 2.3% in June (a 27.6% annualized rate) and noted that "So far in 2021, rental prices have grown a staggering 9.2%. To put that in context, in previous years growth from January to June is usually just 2-3%."

While the red-hot Sunbelt markets continue to lead the surge, rents in the hard-hit urban markets have exhibited a sharp rebound since bottoming in early 2021. Rents in San Francisco, for example, are still 14 percent lower than they were in March 2020, but the city has seen prices increase by 17 percent since January of this year. A handful of markets - including Spokane, WA which recorded an 8.1% increase in June alone - have recorded rent growth above 25% through the first half of 2021.

Hotel: Ashford Hospitality (AHT) slid more than 35% today after providing a business updating and announcing a 1-for-10 reverse stock split that will be effective on July 16th. AHT reported that its RevPAR in June was down 37% compared to 2019 levels, a mild sequential improvement from May when RevPar was 47% below 2019 levels. For the full Q2 period, AHT recorded RevPAR that was 46% below 2019-levels. Braemar Hotels (BHR) - which is also externally advised by Ashford (AINC) - reported comparatively better data wit June RevPAR lower by 15% from 2019 while May was 25% below 2019-levels. For the full Q2 period, BHR recorded RevPar that was 20% below 2019-levels. Last week, STR reported that gross operating profit for U.S. hotels reached 70% of the comparable 2019 level in May, on average.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.2% today following declines of 3.2% last week. Commercial mREITs slipped 0.3% today after declining 3.5% last week. In our cannabis REIT report published today, we discussed the newest mREIT, AFC Gamma (AFCG). AFCG's portfolio is comprised of loans to eleven different borrowers across 27 individual properties, totaling approximately $166 million in total principal amount. Its loan portfolio has an average cash interest rate of 13.5% and its loans typically have up to a five-year maturity, secured by a lien on the real estate.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.08% today, on average, but outperformed their respective common stock issues by an average of 1.33%. So far in 2021, REIT Preferred stocks are higher by 9.76% on a price return basis. The average REIT preferred pays a current yield of 5.94% and trades a slight premium to par value.

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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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