Alex Pettee, CFA
Stimulus Hopes | Stocks Rebound | Rent Collection Improves
U.S. equity markets rallied Friday, but not enough to prevent a fourth-straight week of declines for the S&P 500. Coronavirus concerns and stalled stimulus negotiations continue to weigh on investor sentiment.
Ending the week lower by roughly 0.6%, the S&P 500 finished higher by 1.6% today while the tech-heavy Nasdaq 100 jumped 2.3% to snap a three-week losing streak.
Real estate equities were among the leaders today with the broad-based Equity REIT ETF (VNQ) finishing higher by 2.0% today all 18 property sectors in positive territory.
Glimmers of hope for another round of fiscal stimulus, along with better-than-expected housing data helped to fuel a late-week rebound that pulled the Nasdaq out of "correction territory."
NAREIT released its monthly Rent Collection Survey yesterday which showed continued improvement across the surveyed sectors. Rent collection among net lease REITs, for example, has improved from around 70% in April to 95% in September.
Real Estate Daily Recap
U.S. equity markets rallied Friday, but not enough to prevent a fourth-straight week of declines for the S&P 500. Coronavirus concerns and stalled stimulus negotiations continue to weigh on investor sentiment. Ending the week lower by roughly 0.6%, the S&P 500 ETF (SPY) finished higher by 1.6% today while the tech-heavy Nasdaq 100 (QQQ) jumped 2.3% to snap a three-week losing streak. Real estate equities were among the leaders today with the broad-based Equity REIT ETF (VNQ) finishing higher by 2.0% today all 18 property sectors in positive territory. The Mortgage REIT ETF (REM) gained 2.5%.
Volatility has picked up again over the last month following a late-summer lull, fueled by concerns over global economic growth amid a renewed uptick in coronavirus cases in many European countries. Glimmers of hope for another round of fiscal stimulus helped to fuel a late-week rebound. 10 of the 11 GICS equity sectors finished higher on the day, led by the Technology (XLK), Commerical Real Estate (XLRE), and Utilities (XLU) sectors. Residential REITs led the way for the Hoya Capital Housing Index despite a pullback from the Homebuilders. We'll have a full recap of this week's performance in our Real Estate Weekly Outlook report published tomorrow morning.
Today, we published Homebuilders: A V-Shaped Vendetta. An antihero of the prior financial crisis, Homebuilders have seemingly been on a vendetta over the last six months, asserting themselves as the unexpected leader of the early post-pandemic recovery. Homebuilders were slammed at the outset of the pandemic on fears that a coronavirus-induced recession could inflame a repeat of the Great Financial Crisis for the critical U.S. housing. Instead, the U.S. housing industry has roared back to life in recent months. New Home Sales, Existing Home Sales, and Home Prices have all seen a substantial reacceleration this year. The sharp rebound in housing market activity has been aided by longer-term macroeconomic trends of favorable millennial-led demographics, historically low housing supply, and record low mortgage rates.
Homebuilder earnings have been impressive nearly across-the-board since the start of the pandemic as most of the largest builders entered this period of uncertainty with a full head of steam. Commentary on earnings calls has been decidedly positive as recently-reporting builders - KB Home and Lennar - remarked that momentum has continued and even accelerated in late August and into early September, bucking the normal seasonal demand trends. Despite a weak start to Q2 in April and into May, homebuilders still reported a stellar 20% jump in net order growth, the most closely watched earnings metric, and a leading indicator of future revenue and home deliveries.
Housing remains an “unloved” sector despite the compelling long-term tailwinds at its back. Homebuilders trade at deeply discounted valuations to the S&P 500 despite their stellar growth rates. Despite leading the early stages of the post-pandemic economic rebound, homebuilders remain a relatively unloved sector, still trading at deep discounts to historical and market multiples. Homebuilders currently trade at an average trailing twelve-month Price to Earnings ratio of 12.1x, far below the roughly 28x trailing P/E multiple on the S&P 500. That valuation gap extends further when looking at forward P/E multiples, which reflect the particularly strong rebound in EPS expected over the next year for homebuilders.
Commercial Equity REITs
It was a slow 24 hours of REIT newsflow as the sector gears up for the start of Q3 earnings season in mid-October. NAREIT released its monthly Rent Collection Survey yesterday which showed continued improvement across the surveyed sectors. Rent collection among net lease REITs has improved from around 70% in April to 95% in September. Collection rates among shopping center REITs have improved from below 50% in April to 82% by September. Apartment REITs continue to report rent collection around 96%. Apartment deferrals and forbearance continue to be minimal. Both retail subsectors show a fairly steady downward trend in deferrals from May to just over 5% in September for free standing and roughly 4% for shopping centers.
Skilled nursing REIT Omega Healthcare (OHI) finished marginally lower today after it announced yesterday afternoon that it is revising its method of accounting for lease-related revenue for tenants that have notified the company of potential bankruptcy risks. This change will result in "meaningfully lower" revenue in Q3, but cash rents, funds available for distribution, and cash flows won't be affected. OHI expects to write down straight-line receivables and lease inducements of roughly $140M in the September quarter, representing $65M for Genesis and $75M for Agemo. As we discussed in Healthcare REITs: Don't Pull The Plug Yet, the pandemic further exasperates issues that skilled nursing REITs are facing with their troubled operators, but these operators have also been significant beneficiaries of government relief programs.
Earlier this week, we published Industrial REITs: Virus Exposes Frail Supply Chains. The "hub of e-commerce" and the hottest property sector of the last half-decade, Industrial REITs have been unfazed by the coronavirus-induced pain that has encumbered much of the REIT sector. The dramatic acceleration in e-commerce adoption has pulled forward the "retail apocalypse" trends as retailers divert more of their capital away from malls and into distribution supply chains. While much of the REIT sector was slashing dividends this year, nearly half of industrial REITs have raised dividends in 2020. Rent collection among industrial REITs has averaged more than 97% since April. With the pandemic exposing deficiencies in supply chains, we believe the logistics-boom is back in the early-innings.
As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished higher by 2.6% today but ended the week lower by 4.0%. Commercial mREITs gained 2.4% today but finished the week lower by 3.9%. We saw a flurry of dividend announcements this week including a dividend boost from New Residential Investment (NRZ). Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. 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 available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 1.30% today, on average, but underperformed their respective common stock issues by an average of 1.26%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.84% 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
We'll have a full analysis of this week's busy slate of economic data in our Real Estate Weekly Outlook report published on Saturday morning.
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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.