Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Tech Under Fire | REITs Rebound | European Lockdowns

Daily Recap

  • U.S. equity markets finished mixed on Thursday as mega-cap technology stocks were dragged down by an escalating controversy over the censorship of a New York Post report critical of Joe Biden.

  • Giving back its gains on the week, the S&P 500 finished lower by 0.1% today while the tech-heavy Nasdaq 100 dipped 0.7%. Mid-cap and Small-cap stocks, however, gained 1% today.

  • The broad-based Equity REIT ETF (VNQ) finished higher by 0.5% today with 12 of 18 property sectors in positive territory while the Mortgage REIT ETF (REM) gained 0.3% on the day.

  • Equity markets recovered throughout the day after a rough session in Europe as the continent deals with a "second wave" of the coronavirus pandemic, sending several countries back into lockdowns.

  • Homebuilders gained on data showing fresh record-lows on the average 30-Year Mortgage Rate. Jobless claims data this morning painted a mixed picture, however, as Initial Claims ticked higher to nearly 900k, but Continuing Claims declined by more than a million.

Real Estate Daily Recap

U.S. equity markets finished mixed on Thursday as mega-cap technology stocks were dragged down by an escalating controversy over the censorship of a New York Post report critical of former Vice President Joe Biden. Giving back its gains on the week, the S&P 500 ETF (SPY) finished lower by 0.1% today while the tech-heavy Nasdaq 100 (QQQ) dipped 0.7%. Outside of the tech sector, it was actually a decent day as Mid-Cap (MDY) and Small-Cap (SLY) stocks finished higher by roughly 1%. The broad-based Equity REIT ETF (VNQ) finished higher by 0.5% today with 12 of 18 property sectors in positive territory while the Mortgage REIT ETF (REM) gained 0.3% on the day.

Equity markets recovered throughout the day after a rough session in Europe as the continent deals with a "second wave" of the coronavirus pandemic, sending several countries back into lockdowns, which will almost surely reverse the already-slow economic recovery in the region. Despite the tech-related sell-off, 6 of the 11 GICS equity sectors finished higher on the day, led by the Energy (XLE), Financials (XLF), and Commercial Real Estate (XLRE) sectors. Homebuilders and the broader Hoya Capital Housing Index also delivered a strong day after Freddie Mac reported that mortgage rates dipped to yet another record-low this week as the housing industry remains the brightest spot of the recovery. 

While the housing markets have continued their relentless upward trajectory, the employment recovery has shown signs of losing steam in recent weeks. Data from the Department of Labor showed that Initial Jobless Claims ticked higher to 898k from last week's upwardly revised 845k, and roughly steady with the historically-elevated levels seen over the last month. Continuing Claims, however, decreased to 10.02 million, down another one million from last week. Since the peak in early May at 24.9 million, Continuing Claims have retreated by 14.9 million. The insured unemployment rate slid 0.9 percentage point to 6.8%, the lowest unemployment rate since February, and generally consistent with last month's BLS  report that showed that the "headline" unemployment rate ticked down to 7.9% from 8.4% in the prior month.

Commercial Equity REITs Today, we published Cell Tower REITs: 5G Is Here. Throughout the coronavirus pandemic, the high-flying cell tower sector has thrived. Cellular network usage has surged as businesses, schools, and individuals stay connected via virtual interaction. Apple's (AAPL) upcoming iPhone 12 launch represents the true "arrival" of 5G, the much-anticipated next-generation mobile network that promises to usher in a new era of technological innovation. Cell tower REITs - American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) - continue to benefit from favorable competitive positioning within the telecommunication sector. While these REITs are priced for perfection, low supply and high demand should translate into continued pricing power for cell tower REITs.

It's been a fairly quiet week of REIT-related news flow ahead of the start of real estate earnings season next week, but we did hear a number of business updates and dividend announcements over the last 24 hours. National Retail (NNN), Industrial Logistics (ILPT), Service Properties (SVC), Office Properties (OPI), and Diversified Healthcare (DHC) all declared dividends that were in-line with previous levels. We've now tracked 31 equity REITs in our universe of 170 REITs to raise their dividend in 2020 compared to 65 equity REITs that have reduced or suspended their dividend. 74 REITs have maintained payouts at prior levels.

Troubled mall REIT Pennsylvania REIT (PEI) surged more than 10% today after it reached an agreement with 80% of its bank lenders under which the banks would provide an additional $150M to recapitalize the business and extend its debt maturity schedule. It noted that if the company is unable to secure the support of the remaining lenders holding less than 20% of the debt, it may need to complete this restructuring through a prepackaged reorganization under Chapter 11. We discussed recent trends in the mall REIT sector in Mall REITs: Shop Till You Drop. The forthcoming post-pandemic "suburban revival" offers a glimmer of hope for deep value speculative investors, as does Amazon's rumored interest in converting vacated department store space into distribution centers.

A new real estate ETF launched today, the Emles Real Estate Credit ETF (REC), which invests in a portfolio of corporate fixed-rate real estate bonds. REC, which has an expense ratio of 0.48%,  Solactive U.S. Real Estate Bond Index, tracks the Solactive U.S. Real Estate Bond Index, a market value weighted index designed to measure the performance of corporate bonds issued by U.S. companies in the real estate sector. For inclusion in the index, bonds must have at least 36 months to maturity and have a minimum credit rating of B- / B3 from S&P and/or Moody’s. We analyzed the holdings based on property sector below, noting that the fund offers fairly diversified exposure across the REIT sector. 

Earlier this week, we published Healthcare REITs: Signs of Life. 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 the success of a potential vaccine. Despite being ground-zero of the coronavirus pandemic, rent collection among healthcare REITs was actually among the strongest in the real estate sector, and we maintain a positive long-term prognosis for the sector. Healthcare REIT rent collection averaged 96% in April through August with near-perfect rent collection in the research/lab space, medical office building, and triple-net senior housing and skilled nursing facilities, offset by depressed rent collection in RIDEA senior housing facilities.

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.)

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 0.1% today and are now lower by 0.5% on the week. Commercial mREITs gained 0.8% but remain lower by 0.4% this week. Tremont Mortgage (TRMT) declared a $0.01/share quarterly dividend, in line with its previous (reduced) rate. Orchid Island Capital (ORC) also declared a $0.065/share monthly dividend, in line with its previous reduced rate. Yesterday afternoon, Broadmark Realty (BRMK) declared a $0.06/share monthly dividend, also in line with its previous (reduced) rate.

Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Last month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates.

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished higher by 0.24% today, on average, but underperformed their respective common stock issues by an average of 0.42%. Among REITs that offer preferred shares, the performance of these securities has been an average of 20.54% 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.

This Week's Economic Calendar 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.

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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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