Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Turbulent Week | Dividend Hikes | Pre-Election Jitters

  • U.S. equity markets finished sharply lower on Friday, closing out the worst week for stocks since March, as pre-election jitters and coronavirus concerns overwhelmed a strong slate of economic data.

  • Dipping more than 5% this week, the S&P 500 finished lower by 1.0% this week while the Nasdaq 100 dipped by 2.5% and the Dow Jones Industrial Average declined 158-points.

  • Real estate equities actually outperformed today and on the week as the broad-based Equity REIT ETF (VNQ) finished lower by 0.6% today with 4 of 18 property sectors in positive-territory.

  • Today's sell-off came despite better-than-expected economic data this morning with Personal Income, Personal Spending, Consumer Sentiment, and PMI data all topping estimates.

  • Postal Realty (PSTL) became the 37th equity REIT to raise its dividend this year. At the half-way point of REIT earnings season, results have been better-than-expected with 6 additional dividend hikes.

Real Estate Daily Recap

U.S. equity markets finished sharply lower on Friday, closing out the worst week for stocks since March, as pre-election jitters and coronavirus concerns overwhelmed a generally strong slate of economic data. Dipping more than 5% this week, the S&P 500 ETF (SPY) finished lower by 1.0% this week while the tech-heavy Nasdaq 100 (QQQ) dipped by 2.5% and the Dow Jones Industrial Average (DIA) declined by 158 points. Real estate equities actually outperformed today and on the week as the broad-based Equity REIT ETF (VNQ) finished lower by 0.6% today with 4 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM) declined by 0.9%.

A cascading wave of economic lockdowns across Europe has rattled global equity markets while narrowing poll numbers in the U.S. - and increased likelihood of a divided government - may compromise the prospects of a renewed fiscal stimulus package. 9 of the 11 GICS equity sectors finished lower on the day while all 11 GICS equity sectors finished lower by at least 3.7% on the week. Today's sell-off came despite better-than-expected economic data this morning with Personal Income, Personal Spending, Consumer Sentiment, and PMI data all topping estimates. We'll have a full recap of this week's busy slate of economic data and REIT earnings in our Real Estate Weekly Outlook report published on Saturday morning.

Commercial Equity REITs Today, we published our REIT Earnings Halftime Report: Dividend Cuts, No More. We're at the halfway-point of another newsworthy REIT earnings season. Results thus far have been better-than-expected as dividend cuts have given way to dividend boosts. After 63 equity REITs and 32 mortgage REITs cut dividends in Q2, just three REITs have announced a reduction since then while 39 REITs have raised dividends above pre-pandemic rates. Real estate is anything but monolithic. Amid the pandemic, the "essential" property sectors - housing, technology, and e-commerce/industrial - have actually become stronger, perhaps at the expense of non-essential property sectors. We recap the notable earnings reports over the last 24 hours below.

Net Lease: WP Carey (WPC) outperformed today after REPORTING near-perfect rent collection and resuming its 2020 guidance. WPC now sees FFO declining by 6% this year compared to their initial pre-pandemic guidance which forecast a decline of 1.3% this year. Netstreit (NTST) finished lower by roughly 2% today despite REPORTING yesterday afternoon that rent collection improved to 100% in October. We've now heard results from five of the sixteen net lease REITs thus far, setting up a busy week of earnings next week. Specialty net lease REIT Postal Realty (PSTL) also finished lower despite becoming the 37th equity REIT to raise its dividend above pre-pandemic levels this morning. Major reports next week will be Realty Income (O), National Retail (NNN), and Store Capital (STOR).

Data Center: Digital Realty (DLR) dipped by roughly 3% today despite reporting yesterday afternoon that it booked $89 million in incremental revenues in Q3 - on the high end of expectations - while making it a perfect five-for-five by raising full-year FFO guidance. Following a record-setting quarter of leasing activity in the second quarter, the third quarter saw some moderation in activity consistent with downbeat reports from major non-REIT data center players like Intel (INTC). It's tough to complain about a quarter that saw all five data center REITs boost FFO guidance, however, as the sector now see AFFO growth rising by 3% this year, one of just a handful of property sectors that will see positive FFO growth in 2020.

Apartments: Camden Properties (CPT) jumped nearly 5% after REPORTING relatively solid results yesterday afternoon. AIMCO (AIV) and UDR Inc (UDR) also finished higher today following yesterday's reports. The "urban exodus" theme was on full display this quarter as apartment REIT properties in the "shutdown cities" - NYC, L.A., Chicago, and San Francisco – have seen residents flee to lower-cost and safer suburban markets and more business-friendly Sunbelt metros. While rent collection remains strong at roughly 97-98%, rental rates and occupancy dipped considerably in urban markets.  Sunbelt-focused REITs including Mid-America (MAA) continue to see positive year-over-year rent growth and we saw signs of an acceleration in rent growth in October. 

Shopping Centers: Cedar Realty (CDR) finished lower by more than 3% today after it reported yesterday afternoon that same-store NOI dipped by 9.1% in Q3, in-line with the average among the six shopping center REITs to report thus far. For shopping center REITs, same-store NOI growth - which declined by an average of nearly 18% in Q2, has become "less bad" but is still not pretty with average reported declines of 9% thus far. The thirteen shopping center REITs that cut their dividend early in the pandemic are likely to be among the last to resume payouts, as ROIC noted that it won't resume its dividend until early 2021. The major reports next week will be Regency Centers (REG), Federal Realty (FRT), and Kimco (KIM).

Hotels: Xenia Hotels (XHR) finished sharply lower today after it reported this morning that occupancy rates averaged 24.7% in the third quarter, but also noted that 36 of the company's 37 hotels and resorts are open and operating with occupancy improving to 33% so far in October. Pebblebrook Hotels (PEB) also finished sharply lower after reporting yesterday afternoon that it averaged 19.5% occupancy in Q3. 39 of its hotels and resorts currently open, which is approximately three-fourths of the Company’s portfolio. Among the five hotel REITs to report results this far, occupancy rates improved 20-percentage-points in Q3 from last quarter. This is broadly consistent with STR data which has shown that national hotel occupancy has rebounded to 50% by mid-October, a recovery that has held steady despite strong seasonal headwinds. TSA Checkpoint data, which correlates closely with hotel occupancy, shows that airline travel has continued to grind higher in recent weeks despite the seasonal acceleration in COVID-19 cases.

Timber: Weyerhaeuser (WY) dipped roughly 5% today despite reporting relatively strong results this morning and resuming its quarterly dividend. Its resumed dividend of $0.17 per share, however, is below its pre-pandemic rate of $0.34 per share. Riding the red-hot housing market, its wood products segment generated record high adjusted EBITDA, beating the previous high by almost 60%. Lumber prices (LB1:COM) have cooled, however, as the wood products shortage has cooled as production has kicked into gear, which has pressured the pure-play timberland REITs like Catchmark (CTT) and Rayonier (RYN). RYN commented earlier this week: "lumber pricing still looks to be historically strong going into the end of the quarter. And we believe going into the spring also from what we’re hearing from our customers and expectations for strong housing and repair remodeling activity in 2021."

Mortgage REITs As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 1.6% today and ended the week off by 5.3%. Commercial mREITs declined by 0.7% today and ended the week lower by 3.0%. Arbor Realty (ABR) gained more than 1% today after reporting strong results and boosting its dividend for the second time this year, one of two mREITs currently paying dividends above its pre-pandemic rate. Fellow commercial mREIT Ladder Capital (LADR) finished higher by 1% after its BVPS rose by 1% last quarter. On the residential-side, Orchid Island (ORC) finished higher by 1.3% after it reported that its tangible Book Value Per Share rose by 4% in Q3. Redwood Trust (RWT) dipped 1.3% despite REPORTING a 15.5% jump in its BVPS. 

Earlier this week we published our Mortgage REIT Earnings Preview. Mortgage REITs took center-stage during the early stages of the pandemic as financial market instability violently shook the mREIT sector to the core with mind-numbing declines of more than 70%. Buoyed by a suddenly red-hot U.S. housing market, residential mREITs have rallied back from the brink over the last two quarters and have nearly doubled in value from their lows. The 3 trends we're watching this earnings season: 1) Dividend resumptions, 2) Updated book values, and 3) Macroeconomic commentary.

REIT Preferreds & Bonds As tracked in our all-new REIT Preferred Stock & Bond Tracker, REIT Preferred stocks finished lower by 0.28% today, on average, but outperformed their respective common stock issues by an average of 0.98%. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.98% higher in 2020 than their respective common shares.

This Week's Economic Data We'll have a full recap of this week's busy slate of economic data in our Real Estate Weekly Outlook report published on Saturday morning.

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