• Alex Pettee, CFA

Strong Week For REITs • Retail Rebound • Earnings Begin

Summary

  • U.S. equity markets continued their rally Friday - completing their best week since July - following a strong slate of corporate earnings results and better-than-expected retail sales figures.

  • Gaining nearly 2% on the week, the S&P 500 climbed 0.8% today while the Mid-Cap 400 finished higher by 0.1% but the Small-Cap 600 slipped 0.1%.

  • Real estate equities - which gained nearly 4% on the week - were mixed today as the Equity REIT Index finished lower by 0.1% with 11-of-19 property sectors in positive territory.

  • Prologis (PLD) was higher today after the logistics giant kicked off REIT earnings season this morning with a strong report, beating consensus estimates and boosting its 2021 guidance. REIT earnings season heats up next week.

  • Despite slumping consumer confidence, Retail Sales were stronger than expected in September, advancing 0.7% from the prior month and 13.9% from last September. Consumer inflation expectations, however, reached fresh 12-year highs.

Real Estate Daily Recap

U.S. equity markets continued their rally Friday - completing their best week since July - following a strong slate of corporate earnings results and better-than-expected retail sales figures. Gaining nearly 2% on the week, the S&P 500 climbed 0.8% today while the Mid-Cap 400 finished higher by 0.1% but the Small-Cap 600 slipped 0.1%. Real estate equities - which gained nearly 4% on the week - were mixed today as the Equity REIT Index finished lower by 0.1% with 11-of-19 property sectors in positive territory while Mortgage REITs declined by 0.1%.

A solid start to third-quarter corporate earnings season helped to relieve some jitters over potential "stagflation" while inflation reports this week indicated that we may currently be seeing the worst of the price pressures. Five of the eleven GICS equity sectors were higher today, led to the upside by the Consumer Discretionary (XLY), Financials (XLF), and Industrials (XLI) sectors. We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

The Commerce Department reported this morning that Retail Sales were stronger-than-expected in September, advancing 0.7% from the prior month and 13.9% from last September. An outlier in an otherwise soft slate of consumer data over the past month, spending on back-to-school and back-to-the-office items appeared to be behind the strength. Spending at book and music stores jumped nearly 4% from the prior month while spending at general merchandise stores rose 2%. Reflecting an increased worry among consumers and investors, however, spending at gasoline stations jumped 1.8% from the last month and was higher by nearly 40% from the prior year, the highest among any retail category.

On that point, ongoing concerns over inflation and anxiety over lingering COVID restrictions have weighed heavily on consumer and business confidence over the past three months, sending the University of Michigan’s consumer sentiment index tumbling to 10-year lows this summer. After a small recovery in September, sentiment dipped yet again in the preliminary October reading. The report noted the declines in confidence were due almost entirely to complaints about rising prices. Also in the report, data showed that consumers expect inflation to rise 4.8% over the coming year, the highest since 2008.

Equity REITs & Homebuilders

Homebuilders: Today, we publish Shortages Everywhere which discussed recent trends in the homebuilding sector. Homebuilders - which emerged as unexpected leaders early in the pandemic - dipped into "bear market territory" in early October as supply chain headwinds, soaring home prices, and rising rates spooked investors. Record-low supply levels and robust single-family housing demand sent home prices soaring, discouraging potential buyers. Surging rents - and a desire for an inflation-hedging asset - have again sparked recent demand. Housing remains a deeply “unloved” sector despite the compelling long-term tailwinds at its back. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates.

Industrial: Prologis (PLD) was higher today after the logistics giant kicked off REIT earnings season this morning with a strong report, beating consensus estimates and boosting its 2021 guidance. PLD raised its full-year same-store NOI growth outlook to 5.9% at the midpoint, up roughly 40 basis points from its prior outlook, and raised its FFO outlook to 8.4%, up 160 basis points from its prior outlook. Despite increasingly empty shelves, average occupancy in Q3 increased 60 basis points from Q2 to 96.6%. Prologis CFO commented, "Most of the benefit from the current environment will accrue to the future given our 22% in-place-to-market rent spread."

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly lower today as commercial mREITs slipped 0.3% but finished the week higher by 2.0%. Residential mREITs declined 0.7% but were higher by 0.7% on the week. Redwood Trust (RWT) was little changed today after it announced its latest PropTech investment in Canopy Financial Technology Partners, a due diligence and third-party review fintech firm. Earlier this month, RWT announced an investment in rental ownership platform Flock Homes and a venture with Point on a new form of home equity securitization. The average residential mortgage REIT now pays a dividend yield of 8.48% while the average commercial mortgage REIT pays a dividend yield of 6.67%.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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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