Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Stimulus Hope | REIT Guidance Boost | Housing Leads Recovery

Daily Recap

  • U.S. equity markets rebounded Tuesday on renewed hopes for an agreement on the elusive fiscal stimulus package while strong housing data and positive vaccine news also lifted investor optimism.

  • Coming off declines of 1.5% yesterday, the S&P 500 finished higher by 0.4% today while the tech-heavy Nasdaq 100 gained 0.2% and the Dow Jones Industrial Average rebounded 113 points.

  • Following a dip of 1.6% yesterday, the broad-based Equity REIT ETF (VNQ) finished higher by 0.8% with 16 of 18 property sectors in positive territory while Mortgage REITs gained 0.7%.

  • Housing Starts and Building Permits rose again last month as the housing industry remains the leader of the recovery. Homebuilder NVR Inc (NVR) jumped after it reported that new orders in the quarter surged by 40%.

  • Industrial REIT Prologis (PLD) gained after boosting FFO guidance this morning. PLD now expects Core FFO growth of 13.7% this year which will likely be the highest among large-cap REITs.

Real Estate Daily Recap

U.S. equity markets rebounded Tuesday on renewed hopes for an agreement on the elusive fiscal stimulus package while strong housing data and positive vaccine news also lifted investor optimism. Coming off declines of 1.5% yesterday, the S&P 500 ETF (SPY) finished higher by 0.4% today while the tech-heavy Nasdaq 100 (QQQ) gained 0.2% and the Dow Jones Industrial Average (DIA) rebounded 113 points. Following a dip of 1.6% yesterday, the broad-based Equity REIT ETF (VNQ) finished higher by 0.8% with 16 of 18 property sectors in positive territory while the Mortgage REIT ETF (REM) gained 0.7% on the day.

The on-again-off-again status of stimulus talks continues to whipsaw equity markets as policymakers appear primarily focused on the political calculus of any agreement ahead of next month's election. 10 of the 11 GICS equity sectors finished in the green today, led by the economically-sensitive sectors including Energy (XLE), Financials (XLF), and Consumer Discretionary (XLY). In addition to strong housing data, investors also got a dose of positive vaccine news as Moderna (MRNA) said today that its vaccine could get emergency approval in the U.S. in December if the company gets positive interim results from their clinical trial. Last week, Pfizer (PFE) said it expects to seek U.S. authorization by late November and will have 100 million doses available over the next two months if approved. 

Homebuilders and the broader Hoya Capital Housing Index were among the leaders today after solid Housing Starts and Permits data this morning as well as a strong start to earnings season. Homebuilder NVR Inc (NVR) jumped 3.4% after it reported that new orders in the quarter surged by 40% to 6,681 units as strong demand was fueled by historically low mortgage interest rates and lower resale inventory levels. The average sales price of new orders increased 4% to $384,200. Meanwhile, the Census Bureau reported this morning that Housing Starts in September were 11.1% higher than last year while Building Permits rose 8.1% as the red-hot U.S. housing industry is showing few signs of cooling into the Autumn months.

The single-family segment led the gains in September with single family starts and permits each surging more than 20% on a year-over-year basis as a confluence of near-term factors and long-term tailwinds converged over the last five months that have generated a highly favorable environment for the housing industry. This broad-based strength was consistent with Homebuilder Sentiment data released yesterday by the NAHB, which climbed to new record-highs in October led by record-high homebuyer traffic. Later this week, we'll hear earnings results from three more homebuilders: PulteGroup (PHM), Meritage Homes (MTH), and TRI Pointe (TPH) which we previewed in Homebuilders: A V-Shaped Vendetta.

Commercial Equity REITs

Yesterday, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season kicks this afternoon with more than 200 REITs and housing industry companies reporting earnings over the next month. Rent collection - a metric that was rarely reported in the pre-COVID-19 era - has become the most critical statistic tracked by investors due to its impact on dividend-paying capacity. REITs enter third-quarter earnings season as the third-worst performing out of 11 GICS equity sectors, but improving rent collection and dividend commentary could be a positive catalyst to drive a recovery. In the report, we discussed the trends that we're watching this earnings season in each of the real estate property sectors.

Industrial: Prologis (PLD) gained 0.6% today after boosting FFO guidance and tightened NOI and occupancy guidance. PLD now expects Core FFO growth of 13.7% this year which will likely be the highest among large-cap REITs. PLD now projects cash same-store net operating income up 2.75%-3.25%, in-line at the midpoint of its prior guidance of up 2.5%-3.5%. Prologis CFO Thomas S. Olinger commented, "Our outlook continues to improve based on results, leasing and lower credit losses." Fueled by the "stay-at-home" economy, the coronavirus pandemic has significantly accelerated the adoption and penetration rate of e-commerce. Rexford (REXR) reports after the close today, which we'll discuss in tomorrow's report.

Net Lease: Agree Realty (ADC) gained 0.1% today after it reported solid results yesterday afternoon, noting that Core FFO per share increased 3.5% from last year while AFFO per share increased 4.0%. Rent collection averaged 97% during the third quarter, including 99% in September. ADC also boosted its full-year acquisition guidance to a range of $1.25 billion to $1.35 billion. As a whole, net lease REITs reported lackluster rent collection in the second quarter, but collection has improved sequentially significantly from a low of 65% in April to 95% by September, as the vast majority of tenants have now reopened, prompting five net lease REITs including ADC to boost dividends. 

Manufactured Housing: Equity Lifestyle (ELS) declined 0.7% after it reported 1.8% growth in same-store NOI, up from 1.0% last quarter, driven by a 4.9% gain in same-store revenues, but offset by a 9.1% jump in same-store operating expenses. This jump in expenses was driven by expenses related to Hurricanes Hunna and Isaias as the firm recorded expenses of $2.8 million with offsetting insurance recovery revenue of $2.3 million. A jump in home selling expenses also drove a jump in operating expenses as unit sales increased 43% from 3Q19. RV income gained 5.2% from last year, rebounding from the 8.8% dip recorded last quarter as properties reopened following coronavirus shutdowns. ELS expects core manufactured housing rate growth of 4.0% in 2021 as fundamentals remain very strong in the MH sector.

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 0.6% today but remains lower by 1.1% on the week. Commercial mREITs gained 0.2% but remain lower by 2.2% this week. New Residential (NRZ) gained nearly 5% today after it announced that it plans to add more than 100 employees to it's Jacksonville office to join mortgage operations, underwriting, processing, and sales. Mortgage REIT earnings season is slated to begin next Monday Apollo Commerical (ARI), KKR Real Estate (KREF), and AGNC Investment (AGNC) reporting results, along with New Residential.

Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Hunt Companies (NYSE:HCFT) and Abror Realty (ABR) are the lone mortgage REITs to raise dividends this year above pre-pandemic levels. Last month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished higher by 0.56% today, on average, but underperformed their respective common stock issues by an average of 0.70%. UMH Properties (UMH) called its 8.00% Series B (UMH.PB) preferred issue today. UMH currently has two preferred issues outstanding, UMH.PC and UMH.PD which trade at an average yield of 6.55%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.74% 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

The economic data is just getting started, as we have a jam-packed slate of housing data in the week ahead. On Monday, the NAHB released their Homebuilder Sentiment data for October. On Tuesday, we saw Housing Starts and Building Permits for September. On Thursday, we'll see Existing Home Sales for September. Last month, Existing Home Sales rose by 10.5% from the prior year to the strongest sales pace in 14 years.

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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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