Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Stimulus Whipsaw | Tech Rebound | Housing Stays Hot

Daily Recap

  • U.S. equity markets rebounded Wednesday after President Trump resumed calls for additional stimulus measures segmented into standalone bills, one day after halting negotiations with House Democrats on a larger stimulus package.

  • After declining by 1.4% yesterday, the S&P 500 finished higher by 1.7% today while the tech-heavy Nasdaq 100 gained 1.9% and the Dow Jones Industrial Average rallied 531-points.

  • Following declines of 0.7% yesterday, the broad-based Equity REIT ETF (VNQ) finished higher by 0.2% today with 10 of 18 property sectors in positive territory.

  • Single-family rental operator Invitation Homes (INVH) announced that it is teaming-up with Rockpoint Group in a joint venture partnership to deploy over $1B to acquire and renovate single-family homes in the Western and Southeast US.

  • Mortgage applications to purchase a single-family home remained strong last week and are now higher by 21% from last year as the housing industry continues to lead the post-pandemic recovery.

Real Estate Daily Recap

U.S. equity markets rebounded Wednesday after President Trump resumed calls for additional stimulus measures segmented into standalone bills, one day after halting negotiations with House Democrats on a larger $2 trillion package. After declining by 1.4% yesterday, the S&P 500 ETF (SPY) finished higher by 1.7% today while the tech-heavy Nasdaq 100 (QQQ) gained 1.7% and the Dow Jones Industrial Average (DIA) rallied 531-points. Following declines of 0.7% yesterday, the broad-based Equity REIT ETF (VNQ) finished higher by 0.2% today with 10 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM) gained 0.3% following yesterday's 0.9% decline. 

Equity markets have been whipsawed in recent weeks from the on-again-off-again status of stimulus negotiations. As discussed yesterday, while more stimulus will certainly be appreciated by equity markets and by the Federal Reserve, strong economic data over the last several months has reduced the sense of immediate urgency to expand the already-unprecedented levels of fiscal stimulus. All 11 GICS equity sectors were higher on the day, led by the Materials (XLB), Consumer Discretionary (XLY), and Industrials (XLI) sectors. Strong performance from the home improvement-related stocks lifted the Hoya Capital Housing Index to another day of solid gains following data showing that the red-hot U.S. housing industry is showing few signs of cooling.

The Mortgage Bankers Association reported this morning that mortgage applications to purchase a single-family home rose remained strong last week and are now higher by 21% from last year while refinancing applications are now higher by 50% from last year. The 30-Year Fixed Mortgage Rate with conforming loan balances stands at 3.01%, at record-low levels, and down nearly 75 basis points from last year. Record-low inventory levels combined with robust levels of homebuying activity have put substantial upward pressure on home values since the start of the pandemic. Last week, we reported that the Case Shiller National Home Price Index recorded a 4.8% year-over-year rise in home prices, the largest annual gain since 2018.

Commercial Equity REITs We heard a few more business updates over the last 24 hours. Shopping center REIT Federal Realty (FRTprovided a business update in which it noted that it collected 83% of third-quarter rents, up from its initially-reported Q2 collection rate of 68%. We discussed FRT in Shopping Center REITs: An Essential Bargain. Additional, single-family rental operator Invitation Homes (INVH) announced that it is teaming-up with Rockpoint Group in a joint venture partnership to deploy over $1B to acquire and renovate single-family homes in the Western and Southeast US. The JV will be capitalized with a total equity commitment of $375M, of which $75M will be committed by Invitation Homes and $300M will be committed by Rockpoint. We discussed INVH in Single Family Rentals: The Burbs Are Back.

In the hotel REIT sector, Service Properties Trust (SVC) finished flat after it announced that it has its management agreements with Marriott (MAR) for 122 hotels, effective January 31, and plans to transfer the branding and management of 98 of these hotels to Sonesta and to sell 24 hotels. Ashford Hospitality Trust (AHT) dipped 8.1% after it announced that shareholders approved issuing as many as 126M shares in connection with the offer to exchange shares of the company's preferred stock for cash or shares of common stock. Last week, we published Hotel REITs: Winter Is Coming where we discussed how hotels REITs reported occupancy rates below 20% in Q2, but occupancy rates have since recovered to roughly 45%.

Yesterday, we published Manufactured Housing REITs: Not Enough Homes, So Onto Boats. Manufactured housing REITs ("MH REITs") have proven to be relatively immune from coronavirus-related headwinds that have slammed much of the real estate sector, collecting nearly 100% of rents while also boosting dividends this year. Amid this housing shortage, MH REITs have begun investing in a new - but fundamentally similar - asset class: boat marinas. After a sharp slowdown in late-Spring, recreational vehicle and boat sales have smashed records this summer while the U.S. housing market has roared back to life. MH REITs aren't cheap, but long-term fundamentals remain stellar for this "essential" property sector.

This afternoon, we will publish Prison REITs: The End Is Near on the iREIT on Alpha Marketplace. Prison REITs - the darkest corner of the REIT sector - have been slammed in 2020 as pandemic-related operational struggles have clashed with ever-intensifying political headwinds. Private prisons are facing an existential crisis if Democrats sweep the 2020 Elections, who have pledged to abolish the Federal use of private prisons, amounting to 50% of industry revenues. CoreCivic (CXW) announced it is abandoning the REIT structure, and GEO Group (GEO) likely isn’t far behind. While intrinsic value exists - and the U.S. needs somewhere to house its roughly two million inmates -  these companies will likely face continued difficulty operating as public entities.

Undoubtedly the most controversial real estate sector, Prison REITs have been under assault from the hard-line "cancel culture" that views private prisons as conspirators in a powerful “prison industrial complex”. Yesterday, as previously announced during their Q2 earnings report, Prison REIT GEO Group (GEO) declared a $0.34/share quarterly dividend, a decrease from their prior dividend rate of $0.48 per share. 65 equity REIT out of our universe 170 equity REITs have reduced or suspended their dividend in 2020. 29 equity REITs, including manufactured housing REITs Equity Lifestyle (ELS) and Sun Communities (SUI) have raised dividends in 2020 to levels above their pre-pandemic rates, primarily in the "essential" property sectors - technology, housing, and industrials.

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished higher by 0.5% today and are now higher by 0.1% this week. Commercial mREITs finished flat today and are now off by 1.0% this week. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates. 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 0.17% today, on average, and outperformed their respective common stock issues by an average of 0.03%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.37% 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 calendar slows down in the week ahead after a frenetic slate of employment and housing data over the last two weeks. This morning, we saw a flurry of PMI data which showed a continued rebound in services activity in September. On Tuesday, we'll see JOLTs Job Openings data, a detailed (but backward-looking) breakdown of employment trends in August. As usual, we'll also be watching the weekly MBA Weekly Mortgage Applications data on Wednesday and Jobless Claims data on Thursday.

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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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