Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Stocks Slide | COVID Concerns | Earnings On Tap

Daily Recap

  • U.S. equity markets finished sharply lower Monday on renewed concerns over a "second wave" of the coronavirus pandemic after several European countries reimposed "lockdown" measures this weekend.

  • Coming off declines of 0.4% last week, the S&P 500 declined by 1.9% today while the Nasdaq 100 finished lower by 1.5% and the Dow Jones Industrial Average slid 650-points.

  • The broad-based Equity REIT ETF (VNQ) was a relative outperformer today ahead of a busy week of earnings with declines of 1.5% as 16 of 18 property sectors finished in negative territory.

  • New Home Sales in September pulled back slightly from last month but were higher by 32.1% from last year. On Thursday, we'll get our first look at third-quarter Gross Domestic Product which is likely to show record-breaking economic growth last quarter.

  • We'll see a jam-packed slate of real estate earnings results over the next 24 hours. This afternoon, American Campus (ACC), QTS Realty (QTS), Retail Opportunities (ROIC), Whitestone REIT (WSR), and Alexandria Real Estate (ARE) reported results.

Real Estate Daily Recap

U.S. equity markets finished sharply lower Monday on renewed concerns over a "second wave" of the coronavirus pandemic after several European countries reimposed "lockdown" measures this weekend while stimulus talks have failed to advance. Coming off modest declines of 0.4% last week, the S&P 500 ETF (SPY) declined by 1.9% today while the tech-heavy Nasdaq 100 (QQQ) finished lower by 1.5% and the Dow Jones Industrial Average (DIA) slid 650 points. The broad-based Equity REIT ETF (VNQ) was a relative outperformer today ahead of a busy week of earnings with declines of 1.5% with 16 of 18 property sectors finishing in negative territory while the Mortgage REIT ETF (REM) declined by 2.7% today.

As discussed in our Real Estate Weekly Outlook, concerns over a "second wave" of the coronavirus pandemic and continued frustration over the ongoing stimulus stalemate have been partially offset over the last several weeks by better-than-expected economic data and strong corporate earnings results.  Political uncertainty will dominate the headlines over the next week - and potentially beyond - as polls tightened ahead of the November 3rd election on a day that saw President Trump lead in a national poll in the Real Clear Politics database for the first time since early September. All 11 GICS equity sectors finished in the red today with the economically-sensitive Energy (XLE), Industrials (XLI), and Materials (XLB) sectors leading on the downside.

 Homebuilders and the broader Hoya Capital Housing Index finished lower as well today despite another slate of solid housing data this morning. Today, the Census Bureau reported that New Home Sales in September pulled back slightly from last month but were higher by 32.1% from last year. Last week, the NAHB reported that Homebuilder Sentiment - a forward indicator of housing market activity - climbed to record-highs in October with all three subcomponents climbing to record highs as well. Also last week, the National Association of Realtors reported that Existing Home Sales rose to the strongest sales pace in 14 years, jumping another 9.4% in September from last month. This week, we'll hear results from homebuilders Taylor Morrison (TMHC), M/I Homes (MHO), and MDC Holdings (MDC). 

Ironically, one of the emerging constraints on the further upside for New and Existing Home Sales is the simple lack of homes available to sell. The inventory of new homes for sale is now lower by 11.5% from last year while the Months Supply of new homes stands at just 3.6 months, down from 5.3 months last September. On the existing sales side, the inventory of existing homes dipped 19.2% from last year, representing a 2.7-month supply at the current sales pace, the lowest in the survey's history. As forecast at the beginning of the pandemic, home prices have reaccelerated amid this favorable supply/demand dynamic. The NAR reported last week that home prices jumped 14.8% from last year and rose at double-digit rates in each of the four major regions from one year ago.

We have another jam-packed slate of economic and housing data in the week ahead. Following the release of New Home Sales data today, On Tuesday, we'll see the Case Shiller Home Price Index and the FHFA House Price Index for August which is likely to show a continued reacceleration in home price appreciation. On Thursday, we'll get our first look at third-quarter Gross Domestic Product which is likely to show record-breaking economic growth last quarter, the final major economic data release before Election Day. We'll also be watching Personal Income and Spending data on Friday as well as PCE Inflation data. 

Commercial Equity REITs Last week, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season kicks into high gear over the next three weeks as more than 200 REITs and housing industry companies will report earnings. 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. We recap the notable earnings reports over the last 24 hours below.

Student Housing: American Campus Communities (ACC) reported results this afternoon, noting that it received 97% of rent for the month of September, the first full month of the new academic year. ACC achieved an average rental rate increase of 1.1% and was 90.3% leased for 2021 same-store properties as of September 30, 2020 versus 97.4% for the same date prior year. This leasing rate and rent growth figures were far above the potentially catastrophic figures some investors feared given the lingering school shutdowns. Students at flagship universities in "college towns" have shown a desire to live on-or-near campus regardless of whether classes are held physically in-session or completed remotely. On the earnings call, we'll be listening for commentary on leasing trends for the Spring semester.

Data Center: QTS Realty (QTS) kicked off data center earnings this afternoon by reporting solid results as the company signed new and modified renewal leases of $26.0 million in Q3, which was one of the highest leasing quarters in QTS history. This compares with their $21 million in activity last quarter and $17 million in 3Q19. Leasing activity - the most closely watched earnings metric - surged in the prior quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. The pandemic appears to have accelerated enterprise investment in cloud computing technologies, as spending on the "virtual office" may replace spending on physical office space. We'll hear results from Equinix (EQIX) on Wednesday and from Digital Realty (DLR) on Thursday (DLR).

Shopping Centers: Retail Opportunities (ROIC) reported this afternoon that it collected 88.7% of total 3Q20 rent and commented that it expects its quarterly dividend to be reinstated in 1Q21. Same-store NOI declined by 3.5% decrease, an improvement from their Q2 decline of 9.3% Whitestone REIT (WSR) reported this afternoon that 90% of Q3 rents and 90% of October rents. Unlike malls, the majority of shopping centers remained operational as "essential businesses" even amid the peak of the lockdowns. Shopping center REITs reported rent collection averaging around 70% in Q2, which we expect to improve to around 90% or higher in Q3. 

Timber: PotlatchDeltic (PCH) reported strong results after the close today as revenues and net income rebounded significantly from last quarter. CEO Mike Covey commented: “Our Timberlands and Wood Products businesses achieved record financial performance as outstanding operational execution by our employees capitalized on the historic run in lumber prices." Caught off-guard by the velocity of the rebound in lumber demand from single-family homebuilding and remodeling activity, timber REITs have struggled to meet customer demand. Lumber prices (LB1:COM) soared to record highs by late summer from the combination of insatiable demand and reduced supply resulting from pandemic-related production shutdowns and forest fires raging in the Pacific Northwest.

Healthcare: Alexandria Real Estate (ARE) reported another strong quarter this afternoon as the research/lab space segment remains the strongest healthcare sub-sector. ARE reported a 4.9% rise in same-store NOI in 3Q20 while leasing spreads jumped 30.9% in the quarter, pulling their YTD leasing spreads up to an impressive 21.5%. Earlier this month, the Wall Street Journal reported that Blackstone is looking at selling or taking public BioMed Realty Trust, the second-largest U.S. owner of life-science buildings with 93 properties, formerly a public REIT that Blackstone took private in 2016. ARE is one of 34 equity REITs to have raised their dividend in 2020 compared to 65 equity REITs that have reduced or suspended their dividend.

Mortgage REITs Yesterday, we published our Mortgage REIT Earnings Preview on iREIT on Alpha which will be published on Seeking Alpha tomorrow morning. Mortgage REIT earnings season "officially" kicks off this week in what is sure to be another newsworthy earnings season. ARMOUR Residential (ARR) was early to the earnings party last week but reported strong results with a 5.7% rise in reported Book Value Per Share. The 22 remaining residential mortgage REITs and all 19 commercial mortgage REITs will report third-quarter earnings over the next three weeks. This afternoon, we'll hear results from KKR Real Estate (KREF), Apollo Commerical (ARI), and AGNC Investment (AGNC).

As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 2.5% today after finishing last week higher by 1.2%. Commercial mREITs declined by 2.8% after finishing lower by 0.3% last week. After leading the gains last week on news that it was expanding its employee-count, New Residential (NRZ) finished lower by 9.3% today after it reported Q3 results this morning that were slightly shy of estimates. NRZ reported Book Value per common share of $10.86, a 1% increase from its BVPS of $10.77 at the end of Q2. NRZ fell short on Q3 core EPS of 31 cents, which missed the average analyst estimate of 36 cents and slipped from 34 cents in Q2 2020. NRZ currently trades at a 27% discount to its Q3 reported Book Value. 

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 0.50% today, on average, but outperformed their respective common stock issues by an average of 1.93%. COVID concerns weighed on the preferred issues of mall stocks including CBL & Associates (CBL) and Washington Prime (WPG) today with average declines of nearly 5%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.35% 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.

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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.

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