• Alex Pettee, CFA

Stocks Slide • REITs Steady • Dividend Hikes

Summary

  • U.S. equity markets were sharply lower Monday with several major global stock indexes dipping into "correction territory" amid ongoing concerns over global economic growth, tax hikes, and the Fed outlook.

  • Declining for the ninth time in the past eleven sessions, the S&P 500 slipped 1.7% today - its largest single-day decline in two months. MidCaps dipped 2% while SmallCaps declined 1.8%.

  • Real estate equities - particularly residential REITs - were a source of stability today as the Equity REIT Index declined a modest 0.6% with 9-of-19 property sectors in positive territory.

  • A bright spot today, data showed that Homebuilder Sentiment remained historically strong in September as marginally improving supply chain conditions and improving buyer traffic bolstered confidence.

  • NexPoint Real Estate Finance (NREF) was among the leaders today after it boosted its dividend by 12% - its second dividend boost this year - and one of 109 REITs that have raised their payouts in 2021.

Real Estate Daily Recap

U.S. equity markets were sharply lower Monday with several major global stock indexes dipping into "correction territory" amid ongoing concerns over global economic growth, tax hikes, and the outlook for Fed policy. Declining for the ninth time in the past eleven sessions, the S&P 500 slipped 1.7% today - its largest single-day decline in two months. The Mid-Cap 400 declined by 2.0% and the Small-Cap 600 fell 1.8% while the Nasdaq 100 dipped 2.0%. Real estate equities were a source of stability today as the Equity REIT Index declined a modest 0.6% today with 9-of-19 property sectors in positive territory while Mortgage REITs were lower by 1.2%.

As discussed in our Real Estate Weekly Outlook, U.S. equity markets have been under pressure over the past two weeks amid concern over tax hike proposals - the largest tax-and-spending plan in more than 50 years - with significant uncertainty over which proposals will ultimately be included in the final bill - or if an agreement can even be reached at all. All eleven GICS equity sectors were lower on the day, dragged on the downside by the Energy (XLE) and Consumer Discretionary (XLY) sectors. Within the Hoya Capital Housing Index, strong performance from residential REITs offset declines from homebuilders ahead of a jam-packed week of housing data, kicking off this morning with stronger-than-expected homebuilder sentiment data.

On that point, the NAHB reported that Homebuilder Sentiment remained historically strong in September. The HMI rose 1 point to 76 - gaining after three months of slight moderation - as marginally improving supply chain conditions and improving buyer traffic bolstered confidence in late August and into early September. While there has been some mild improvement in housing supply chains, conditions remain historically tight as DR Horton (DHI) updated its guidance this morning to reflect "continuing significant disruptions in the supply chain, including shortages and delivery delays in certain building materials along with tightness in the labor market." While DHI lowered its sales guidance, it actually boosted its margin guidance, citing "strong new home demand and limited housing supply" which "continue to support pricing power across most of its operating footprint."

The jam-packed week of economic and housing data continues on Tuesday when we'll see Housing Starts and Building Permits data, which is expected to show that building activity modestly accelerated in August as supply chain constraints slowly continue to ease. On Wednesday, the National Association of Realtors releases Existing Home Sales data, and then on Friday, we'll see New Home Sales data for August. We'll also hear commentary from the Federal Reserve - along with their interest rate decision - on Wednesday afternoon and we'll be monitoring a flurry of Purchasing Managers Index ("PMI") data throughout the week.

Equity REITs

Cell Towers: This afternoon, we'll publish an updated report on the cell tower REIT sector, analyzing recent earnings reports and developments in the telecommunications industry. While tower REITs have delivered sector-leading performance over the last half-decade, the "space race" has heated up over the last year. While risks to technological competition from Low Earth Orbit satellites remain low, significant capital is being deployed in LEO network build-outs which could eventually alter the competitive positioning within the telecom sector. We've become more cautious, highlighting the fact that tower REITs are far-and-away the largest REIT sector in the cap-weighted REIT ETFs with nearly twice the weight as the next largest sector, resulting in lower dividend yields and potential idiosyncratic risk for these ETFs.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs held up rather well today as residential mREITs were lower by 1.2% today following gains of 1.1% last week. Commercial mREITs slipped 1.2% today after gaining 1.1% last week. NexPoint Real Estate Finance (NREF) was among the leaders today after it boosted its dividend by 12% to $0.5313/share - its second dividend boost this year - and one of 24 mREITs that has raised their payouts in 2021. Tremont Mortgage (TRMT) was also among the outperformers today after it announced that its shareholders approved its merger with RMR Mortgage (RMRM), which it expects to become effective on September 30. As part of the Merger, the combined company will change its name to Seven Hills Realty Capital and will trade on the Nasdaq under the ticker “SHRC”.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower 0.49% today, on average, but outperformed their respective common stock issues by an average of 0.33%. So far in 2021, REIT Preferred stocks are higher by 10.60% on a price return basis. The average REIT preferred pays a current yield of 5.96% and trades at a slight premium to par value. Over in the bond markets today, Over in the bond markets, apartment REIT Centerspace (CSR) issued $125M of unsecured senior notes in four tranches with a weighted average interest rate of 2.63% and a weighted average maturity of 10.46 years.

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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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