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  • Alex Pettee, CFA

Stocks Rebound • Builders Lead • REIT Earnings Updates

Summary

  • U.S. equity markets rebounded Tuesday as investors bought yesterday's dip, rotating back into risk assets following better-than-expected housing data which has exhibited renewed signs of strength following a modest cooldown.

  • Following declines of 1.6% yesterday, the S&P 500 rallied 1.5% today while the Mid-Cap 400 rebounded 2.8% and the Small-Cap 600 jumped 3.0%.

  • Residential real estate equities led the way today as the Equity REIT Index finished higher by 2.4% with all 19 property sectors in positive territory while Mortgage REITs rallied 2.9%.

  • U.S. home construction activity accelerated in June - snapping a recent supply-chain-shortage-driven slump - as easing bottlenecks and moderating materials prices have put some delayed projects back into motion.

  • Equity LifeStyle (ELS) jumped after reporting another "beat and raise" quarter, a strong read-through for the manufactured housing and broader residential REIT sector as rents continue to soar across the country.

Real Estate Daily Recap

U.S. equity markets rebounded Tuesday as investors bought yesterday's dip, rotating back into risk assets following better-than-expected housing data which has exhibited renewed signs of strength following a modest cooldown. Following declines of 1.6% yesterday, the S&P 500 rallied 1.5% today while the Mid-Cap 400 rebounded 2.8% and the Small-Cap 600 jumped 3.0%. Residential real estate equities led the way today as the Equity REIT Index finished higher by 2.4% with all 19 property sectors in positive territory while Mortgage REITs rallied 2.9%.

Despite the strong bid into U.S. equities, the 10-Year Treasury Yield stayed relatively grounded at around 1.20% today as "American Exceptionalism" has become the emerging consensus as COVID variants continue to wreak havoc on international and emerging economies - particularly in countries lagging in vaccine distribution. All eleven GICS equity sectors were higher on the day, led to the upside by the economically-sensitive sectors including Industrials (XLI) and Financials (XLF). Homebuilders and the broader Hoya Capital Housing Index rallied following a strong start to residential REIT earnings season and on better-than-expected Housing Starts data this morning.

On that point, the Census Bureau reported this morning that U.S. home construction activity accelerated in June - snapping a recent supply-chain-shortage-driven slump - as easing bottlenecks and moderating materials prices have put some delayed projects back into motion. Housing Starts jumped 6.3% in June to a seasonally adjusted annual rate of 1.643 million, which was 29.1% higher than last year. Building Permits retreated in June but remain higher by 23.3% from last year. Soaring rents, easing supply shortages, and retreating mortgage rates is expected to spur a second-wave of home buying activity in the back-half of 2021.


Commercial Equity REITs

Manufactured Housing: Equity LifeStyle (ELS) jumped after reporting another "beat and raise" quarter, a strong read-through for the manufactured housing and broader residential REIT sector. ELS significantly raised its full-year FFO guidance from its prior outlook of 9.7% growth to a revised outlook calling for FFO growth of 13.8% this year. ELS also boosted its 2021 same-store NOI growth outlook from 5.3% last quarter to 7.9% at the midpoint. As discussed in Ground Zero of the Housing Shortage, manufactured housing REITs have been the top-performing property sector over the past decade, continuing the strong momentum into 2021.

Healthcare: National Health Investors (NHI) was among the leaders after it provided a business update in which it noted that it collected 88% of cash rents in July and expects cash collection rates to rise about 90% by the end of the month. Last week in Vaccine Revival we discussed how senior Housing REITs - the hardest-hit sub-sector - have led the recovery this year as occupancy rates appear to have bottomed in early 2021, benefiting from the red-hot and undersupplied housing market. Driven by the aging Baby Boomers - and trillions of dollars in savings and built-up home equity - fundamentals remain particularly compelling over the coming decade for senior housing REITs.

As discussed in our Real Estate Earnings Preview published this morning, REIT earnings season kicks off this week, and over the next month, we'll hear results from more than 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. REITs enter second-quarter earnings season as the best-performing asset class this year with total returns over 25%. Residential REITs have been the positive standouts over the last quarter following a slate of impressive Q1 earnings results and recent data showing a historic surge in apartment and single-family rents. This report discussed the major themes and metrics we'll be watching across each of the real estate property sectors this earnings season.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 2.3% today and are now higher by 0.2% on the week. Commercial mREITs gained 2.3% today but remain fractionally lower on the week. Many of the higher-levered mREITs were among the leaders today after getting slammed yesterday including Invesco Mortgage (IVR) and AG Mortgage (MITT). mREIT earnings season kicks off next week with results from AGNC Investment (AGNC), Apollo Commercial (ARI), and KKR Real Estate (KREF) on Monday.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.40% today, on average, but underperformed their respective common stock issues by an average of 2.53%. So far in 2021, REIT Preferred stocks are higher by 9.19% on a price return basis. The average REIT preferred pays a current yield of 5.97% and trades at a slight premium to par value.

Economic Data This Week

The jam-packed slate of housing data and earnings reports continues on Thursday when we'll see Existing Home Sales data for June which is also expected to show an increase from the prior month despite a record-low quantity of houses for sale as soaring rents and a fresh leg lower in mortgage rates spark another wave of home buying activity. We'll also be watching Jobless Claims data on Thursday and Purchasing Managers' Index ("PMI") data on Friday.

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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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