Alex Pettee, CFA
Tech Surges | REITs Flat | Earnings Ahead
U.S. equity markets added to last week's gains on Monday, gaining ground ahead of a busy week of economic data and the commencement of Q3 earnings season.
Coming off gains of 3.9% last week - its best week in three months - the S&P 500 finished higher by 1.6% today while the tech-heavy Nasdaq 100 jumped 3.1%.
Following gains of 1.3% last week, the broad-based Equity REIT ETF (VNQ) finished higher by 0.6% today with 15 of 18 property sectors in positive territory.
Earnings season "formally" kicks off tomorrow with JP Morgan (JPM), Citigroup (C), and Johnson & Johnson (JNJ) reporting results. It's expected to be a fairly quiet week of REIT-related news flow ahead of the start of real estate earnings season next week.
After a quiet week of economic data, we'll also see a busy slate of inflation, housing, and retail sales data in the week ahead. Tomorrow, we'll see CPI Inflation data and on Friday, we'll see Homebuilder Sentiment and Retail Sales data.
Real Estate Daily Recap
U.S. equity markets added to last week's gains on Monday, gaining ground ahead of a busy week of economic data and the commencement of Q3 earnings season while investors look for signs of progress on fiscal stimulus negotiations. Coming off gains of 3.9% last week - its best week in three months - the S&P 500 ETF (SPY) finished higher by 1.6% today while the tech-heavy Nasdaq 100 (QQQ) jumped 3.1% and the Dow Jones Industrial Average (DIA) added 251-points. Following gains of 1.3% last week, the broad-based Equity REIT ETF (VNQ) finished higher by 0.6% today with 15 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM) gained 0.7% today after ending last week with gains of 1.3%.
Earnings season "formally" kicks off tomorrow with JP Morgan (JPM), Citigroup (C), and Johnson & Johnson (JNJ) reporting results. With bond markets closed for the Columbus Day holiday, equity markets were led today by the mega-cap technology names on a "top-heavy" day with the Technology (XLK), Communications (XLC) sectors leading the gains. The Mid-Cap (NYSEARCA:MDY) and Small-Cap (SLY) segments of the market, which have been whipsawed by the on-again-off-again status of stimulus negotiations, took a breather after gaining roughly 10% over the past two weeks. Homebuilders and the broader Hoya Capital Housing Index, meanwhile, finished higher on the day ahead of a busy week of economic data in the week ahead.
After a quiet week of data, this week's busy slate of data includes inflation, housing, and retail sales data. The Consumer Price Index for September is released on Tuesday and the Producer Price Index comes out on Wednesday. Inflation showed signs of life in the prior two months after most inflation metrics hit multi-decade lows in May and June. On Friday, we'll see Retail Sales data for September and Homebuilder Sentiment data for October, both of which are coming off record-high levels. As it relates to an emerging V-shaped recovery, perhaps a "close second" to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic.
Commercial Equity REITs It's expected to be a fairly quiet week of REIT-related news flow ahead of the start of real estate earnings season next week. Most REITs have now announced the date of their earnings release, which we've compiled below. Earnings season kicks off with Prologis (PLD), Redford (REXR), Agree Realty (ADC), and Equity Lifestyle (ELS) next Tuesday. (Note that REITs that have not yet reported an earnings release date are in italics with an estimated date based on past reports.)
We did hear one business update today from Bluerock Residential (BRG), which jumped 3.3% after it reported that rent collection from its multifamily properties totaled 97% in Q3. Last week, we reported that while much has been written over the past four months about the potentially devastating effects on the rental markets from the July 31st expiration of several relief measures offered by the Cares Act in July, so far these dire forecasts have not come to fruition. Quite the opposite, in fact, as the National Multifamily Housing Council's (NMHC) Rent Payment Tracker found 79.4% of apartment households paid their rent by October 6, which was back in line with the pre-pandemic rate last October.
This afternoon, we will publish Healthcare REIT: Improving Prognosis on the iREIT on Alpha Marketplace. Healthcare REITs - which have been "ground-zero" of the coronavirus pandemic - have shown signs of life over the past quarter on stabilizing fundamentals and on hopes of a potential vaccine. For senior housing REITs, in particular, the pandemic has put a significant dent in near-term demand and has driven significantly higher expenses, but interim updates suggest the worst is behind us. Despite the headwinds, Healthcare REITs reported near-perfect rent collection outside of the senior housing sub-sector. The positive long-term outlook for senior housing remains intact as the long-awaited demographic-driven demand boom is finally arriving, but attitudes towards senior housing need to be monitored.
Strong rent collection and ample access to capital have allowed healthcare REITs to recognize a "glancing blow" as it relates to dividend cuts and suspensions thus far, unlike other high-yield sectors including hotels, malls, and shopping centers that have been ravaged by dividend cuts over the last quarter. Five healthcare REITs have reduced dividends this year while three have raised. Healthcare REITs currently pay an average dividend yield near 5% - well above the REIT sector average of 3.2% - with a sustainable FFO payout ratio of around 70%. We think that investors playing in the "high yield" segment of the REIT sector should favor these healthcare REITs over other troubled sectors facing long-term secular headwinds.
Mortgage REITs As tracked in our Mortgage REIT Tracker, following gains of 1.5% last week, residential mREITs finished higher by 0.3% today. Commercial mREITs gained 0.6% coming off gains of 0.2% last week. Granite Point Mortgage (GPMT) gained 1.1% today after it announced that it plans to internalize its management by making a one-time cash payment of $44.5 million to Pine River, its external manager, and is expected to be effective on December 31, 2020. While the vast majority of equity REITs are internally-managed, the majority of mREITs continue to operate as externally-managed REITs. GPMT expects the internalization to "enhance the Company’s value proposition and drive meaningful benefits for stockholders."
Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates. The latest data and commentary from Black Knight (BKI) showed that the number of Americans in active forbearance on their mortgages saw the largest single-week decline on record last week as the first wave of forbearances from April are hitting the end of their initial six-month term. The national forbearance rate has decreased to 5.6%, down from a peak of roughly 9% in late May. Active forbearances fell below 3 million for the first time since mid-April and an additional 800K forbearance plans are slated to reach the end of their initial six-month term in the next 30 days.
REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished higher by 0.16% today, on average, but underperformed their respective common stock issues by an average of 0.07%. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.47% 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.