Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Supreme Uncertainty | REITs Dip | Stimulus Hopes Dashed

Daily Recap

  • U.S. equity markets finished lower Monday as the prospects for another round of fiscal stimulus dimmed as investors gear-up for a "supreme" political battle ahead of the November election.

  • Following three-straight weeks of losses, the S&P 500 slipped another 1.2% today while the tech-heavy Nasdaq 100 finished lower by 0.1%. The Dow Jones dipped 510 points.

  • Real estate equities, particularly the economically-sensitive property sectors, were under pressure today as the Equity REIT ETF (VNQ) finished lower by 3.0% today with all 18 property sectors in negative-territory.

  • REITs were coming-off a strong week after an encouraging slate of dividend news and rent collection updates. We expect another busy week of dividend news and business updates.

  • We have another busy slate of economic and housing data in the week ahead as well. We'll see Existing Home Sales data tomorrow and New Home Sales data on Thursday as investors will see if the housing industry can continue to lead the economic recovery.

Real Estate Daily Recap

U.S. equity markets finished lower Monday as the prospects for another round of fiscal stimulus dimmed as investors gear up for a "supreme" political battle ahead of the November election. Following three-straight weeks of losses, the S&P 500 ETF (SPY) slipped another 1.2% today while the tech-heavy Nasdaq 100 (QQQ) finished lower by 0.1%. Real estate equities, particularly the economically-sensitive property sectors, were under pressure today as the broad-based Equity REIT ETF (VNQ) finished lower by 3.0% today with all 18 property sectors in negative territory. The Mortgage REIT ETF (REM) slipped 3.2% today after jumping by 4% last week.

As discussed in our Real Estate Weekly Outlook, the death of Justice Ruth Bader Ginsberg and subsequent Supreme Court vacancy throws another curveball into an already contentious U.S. election season and likely diminishes the near-term prospects for another round of fiscal stimulus. Meanwhile, a reacceleration in the coronavirus pandemic in Europe has renewed concerns over a potential "second wave" of the outbreak in the United States. 10 of the 11 GICS equity sectors finished in negative territory today, dragged down by the Materials (XLB), Energy (XLE), and Industrials (XLI) sectors. Homebuilders and the broader Hoya Capital Housing Index finished lower today ahead of a busy slate of home sales data this week.

On Tuesday, we'll see Existing Home Sales for August. Last month, Existing Home Sales surged by 24.7%, which was the strongest monthly gain in the history of the survey and was the highest sales pace since December 2006. Then on Thursday, we'll see New Home Sales for August. Last month, New Home Sales jumped 13.9% and the 901k seasonally-adjusted rate was the strongest sales rate since 2007. Also on Wednesday, we'll see the FHFA House Price Index, which has shown a reacceleration in home price appreciation. As usual, we'll also be watching the weekly MBA Mortgage data on Wednesday and Jobless Claims data on Thursday.

Commercial Equity REITs

The economically-sensitive real estate sectors - particularly the retail and hotel REITs - were under pressure today following a solid week of outperformance after an encouraging slate of dividend news and rent collection updates last week across the REIT sector. Just one equity REIT - data center operator QTS Realty (QTS) - finished in the green today while a half-dozen REITs sold-off more than 10% today including small-cap REITs Condor Hospitality (CDOR), Pennsylvania REIT (PEI), RLJ Lodging (RLJ), and Xenia Hotels (XHR). 

We remain in the heart of dividend declaration season and expect to see at least a few more dividend increases this week. After the Equity REIT sector was slammed by a wave of 64 dividend cuts in March through June, since then, we've seen far more dividend increases than dividend cuts in the REIT sector, including five more boosts from equity REITs and three from mortgage REITs last week. We've now tracked 28 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates - primarily in the "essential" property sectors - technology, housing, and industrials, but net lease REITs have come on strong with five dividend hikes since the start of June.

Last week, we published Timber REITs: Literally On Fire. One of the best-performing REIT sectors this year, Timber REITs have nearly doubled since their mid-pandemic lows in March, reignited by a rejuvenation in the suddenly red-hot U.S. housing market. Housing has proven to be the "ultimate essential service." Households have exhibited a propensity to prioritize housing-related payments and investments in home improvement and living situation upgrades amid the pandemic. Lumber prices have soared to record-highs from the combination of insatiable demand and reduced supply resulting from pandemic-related production shutdowns and forest fires raging in the Pacific Northwest. Rayonier (RYN) and Weyerhaeuser (WY) are the most "geographically exposed" REITs to the West Coast wildfires and both commented this week that direct impacts are not expected to be material, except for indirect impacts through lumber price increases.

Last week, we also published Data Center REITs: Sunlight Through COVID Clouds. A "cloudy" future lies ahead, but that's good news for data center REITs including Digital Realty, Equinix (EQIX), and CoreSite (COR). The physical epicenter of the "cloud," data centers have been the best-performing property sector amid the pandemic. Clear winners of the work-from-home era, corporations will increasingly shift spending on physical office space towards "digital office space" through investments in remote-work infrastructure. Leasing activity - the most closely-watched earnings metric - surged in the second quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. While expensive, the "essential" property sectors - technology, housing, and industrial - are the lone areas of reliable growth within the REIT sector.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs declined by 3.3% after finishing last week with gains of 5.9%. Commercial mREITs declined by 3.2% today after ended last week higher by 2.9%. Under pressure today were some of the higher-risk small-cap mREITs in the sector including Granite Pointe (GPMT), Colony Credit (OTC:CNLC), and Exantas Capital (XAN). On the upside, Sachem Capital (SACH) gained more than 5% after positive commentary published over the weekend. Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

Last week, Hunt Companies (HCFT) became the second mortgage REIT to raise its dividend above pre-pandemic levels by declaring a $0.085 dividend, a 13% increase from its prior dividend of $0.075. HCFT joined Arbor Realty (ABR) as the only mREITs that have increased their dividend in 2020 to levels above 2019 payouts. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised as discussed in our mREIT Earnings Recap.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished lower by 1.53% today, on average, but outperformed their respective common stock issues by an average of 2.78%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.36% 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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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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