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  • Alex Pettee, CFA

Stocks Sink • Merger Monday • REIT Earnings Begin

Summary

  • U.S. equity markets were sharply lower Monday on concerns over the recent reacceleration in worldwide COVID cases, as a strong "risk-off" bid sent U.S. Treasury Yields plunging to five-month lows.

  • The S&P 500 finished lower by 1.6% today - its worst day since May 12. The Small-Cap 600 dipped another 1.9% today, pushing small-caps into "correction" territory.

  • Real estate equities were also lower today as earnings season kicked-off. Equity REIT Index finished lower by 1.8% with all 19 property sectors in negative territory. Mortgage REITs declined 2.5%.

  • Kite Realty (KRG) and Retail Properties of America (RPAI) will merge into a combined company with a market cap of roughly $4.6B, which would make it the fifth-largest shopping center REIT.

  • Industrial REIT Prologis (PLD) was among the leaders after kicking off REIT earnings season on a strong note, boosting its full-year guidance across the board. We'll hear results this afternoon from Equity Lifestyle.

Real Estate Daily Recap

U.S. equity markets were sharply lower Monday on concerns over the recent reacceleration in worldwide COVID cases, as a strong "risk-off" bid sent U.S. Treasury Yields plunging to five-month lows. Following declines of roughly 1% last week, the S&P 500 finished lower by 1.6% today - its worst day since May 12 - while the Mid-Cap 400 retreated 1.7% and the Small-Cap 600 declined by 1.9%, pushing the small-cap index into "correction" territory. Real estate equities were also lower today as earnings season kicked off as the Equity REIT Index finished lower by 1.8% with all 19 property sectors in negative territory while Mortgage REITs declined 2.5%.

As discussed in our Real Estate Weekly Outlook, the "reopening trade" has reversed over the last several weeks amid an acceleration in worldwide COVID cases - particularly in countries lagging in vaccine distribution - which sent the 10-Year Treasury Yield back below 1.20% for the first time since February. All eleven GICS equity sectors were lower on the day, dragged on the downside by the economically sensitive Energy (XLE), Financials (XLF), and Materials (XLB) sectors. Homebuilders and the broader Hoya Capital Housing Index were among the outperformers today following a generally solid slate of data from the NAHB and from Re/MAX (RMAX) which showed that home sales accelerated in June, fueled by a fresh retreat in mortgage rates.

The jam-packed slate of housing data and earnings reports continues on Tuesday when we'll see Housing Starts and Building Permits data which is expected to show a reacceleration in home construction activity in June as supply chain constraints begin to slowly ease and construction materials prices cool from extreme highs. On Thursday, 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.

Commercial Equity 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.

Industrial: Prologis (PLD) was among the leaders today after kicking-off REIT earnings season on a strong note. PLD boosted its full-year guidance across the board, raising its Core FFO growth outlook by 180bps to 6.8% and its same-store NOI growth outlook by 75bps to 5.5% at the midpoint. Prologis commented, "Demand for logistics space is robust and diverse, and operating conditions remain the healthiest in our 38-year history." In our Earnings Preview, we wondered whether last quarter's uptick in industrial releasing spreads was a post-pandemic blip or the start of a new uptrend. In the second quarter, PLD recognized GAAP releasing spreads of 31.5% and Cash releasing spreads of 15.5%, one of the strongest quarters on record, providing early evidence that the strong results in Q1 were part of a sustained trend.

Shopping Center: Kite Realty (KRG) and Retail Properties of America (RPAI) agreed to merge into a combined company that will have an equity market capitalization of roughly $4.6B and a total enterprise value of roughly $7.5B which would make it the fifth-largest shopping center REIT. KRG will be the surviving entity in the transition which is expected to close in Q4 and each RPAI common share will be converted into 0.6230 newly issued KRG common shares in a 100% stock-for-stock transaction. The merger will create an operating portfolio of 185 open-air shopping centers comprised of roughly 32M square feet of owned gross leasable area. KRG intends to maintain its current dividend policy post-closing. The deal follows the pending merger between Kimco (KIM) and Weingarten (WRI) announced in April.

Single-Family Rental: Tricon Residential (OTCPK:TCNGF) - a Canadian-listed SFR owner - announced that it is forming a $5 billion joint venture to buy more than 18,000 rental houses over the next three years. Tricon is partnering with the Teacher Retirement System of Texas, Pacific Life Insurance Co. and a third institution to commit $1.4 billion in initial equity. The joint venture will use the funds and debt to buy homes, focusing on properties that cost roughly $250,000 and U.S. markets where Tricon already operates, though it may also expand into a small number of new markets as Tricon aims to double its holdings to 50,000 rental houses within the next three years. Back in May, Tricon announced a separate joint venture that will seek to buy $1.5 billion worth of purpose-built rental houses.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.8% today after ending last week with 4.6% declines. Commercial mREITs declined 2.3% today after declining by 1.2% last week. BrightSpire Capital (BRSP) - formerly Colony Credit - was among the laggards today after announcing that it reached an agreement for selling a majority of its historical development and/or non-accrual assets to managed vehicles of Fortress Investment for gross proceeds of $223M. The proceeds are in line with its aggregate GAAP and undepreciated book value of the underlying assets as of March 31.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.46% today, on average, but outperformed their respective common stock issues by an average of 2.43%. So far in 2021, REIT Preferred stocks are higher by 8.58% on a price return basis. The average REIT preferred pays a current yield of 5.99% and trades at 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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