• Alex Pettee, CFA

Vaccine Halt • Storage M&A • Inflation Heats-Up

Summary

  • U.S. equity markets were mixed Tuesday as concerns over the impact of the temporary halt of J&J vaccinations - and ongoing COVID issues abroad - weighed on reopening sensitive sectors.

  • Closing at fresh record-highs, the S&P 500 gained 0.3% on the day, but the Mid-Cap 400 and Small-Cap 600 indexes declined by -0.4% and -0.8%, respectively.

  • Real estate equities were again among the leaders today amid a pull-back in interest rates as the broad-based Equity REIT Index gained 0.5% with 15-of-19 property sectors in positive territory.

  • CPI inflation data showed a slightly faster-than-expected rise in consumer prices last month. Consumer prices rose 0.6% from last month, driven by a jump in gasoline prices, which pushed the annual increase to 2.6% - the largest annual rise since 2012.

  • Public Storage (PSA) gained more than 2% today after announcing plans to acquire ezStorage - the largest self-storage company in Maryland, Virginia, and Washington DC - for $1.8B.

Real Estate Daily Recap

U.S. equity markets were mixed Tuesday as concerns over the impact of a temporary safety-related halt of the J&J vaccine in the U.S. - and ongoing COVID issues abroad - weighed on reopening sensitive sectors. Closing at fresh record-highs, the S&P 500 ETF (SPY) gained 0.3% on the day, but the Mid-Cap 400 (MDY) and Small-Cap 600 (SLY) indexes declined by -0.4% and -0.8%, respectively. Real estate equities were again among the leaders today amid a pull-back in interest rates as the broad-based Equity REIT ETFs (VNQ) finished higher by 0.5% with 15-of-19 property sectors in positive territory while the Mortgage REIT ETFs (REM) finished higher by 0.5%.

Despite a hotter-than-expected CPI inflation report this morning, COVID concerns dragged the 10-Year Treasury Yield lower by 5 basis points as investors tempered growth and inflation expectations. Seven of the eleven GICS equity sectors finished higher on the day, led to the upside by the Utilities (XLU), Consumer Discretionary (XLY), and Technology (XLK) sectors. Within the Hoya Capital Housing Index, another strong day from residential REITs offset a mixed day from homebuilders ahead of a busy slate of housing data beginning tomorrow with mortgage application data.

All eyes are on inflation data as investors remain skittish about a potential "overheating" U.S. economy from COVID-related fiscal stimulus measures clashing with supply chain constraints. The BLS reported that Core CPI - which excludes food and energy - was higher by 0.33% in March - the largest month-over-month increase since last August, which pushed the annual increase to 1.65%. The "headline" CPI Index showed more a more significant rise of 0.6% from last month driven by a jump in gasoline prices, which pushed the annual increase to 2.6% - the largest annual rise since 2012.

Commercial Equity REITs

Today we published Prison REITs: The End Is Here. Arguably the "darkest corner" of the REIT sector - prison REITs have been punished by ever-intensifying political hostilities and declining prison populations across the country. Last week, GEO Group (GEO) joined CoreCivic (CXW) in eliminating its dividend and "evaluating its structure as a REIT." Having been effectively "canceled" by public capital markets, privatization appears increasingly likely. Political hostilities aside, demand for private facilities - which have always been a "supplier of last resort" - has declined materially as incarceration rates in the U.S. revert towards the developed market average.

Storage: Public Storage (PSA) gained more than 2% today after announcing plans to acquire ezStorage - the largest self-storage company in Maryland, Virginia, and Washington DC - for $1.8B. ezStorage's portfolio comprises 48 properties located in submarkets with "strong demand drivers and high barriers for new property development." PSA expects the transaction to be immediately accretive to FFO following an anticipated closing in May 2021. We believe that acquisition and consolidation opportunities should be plentiful over the next decade for these storage REITs as the weaker operators are "shaken out" by COVID dislocations. Storage REITs have historically been one of the more active acquirers among REIT sectors as external growth via acquisitions has explained a significant percentage of FFO growth over the last decade.

Malls: Washington Prime Group (WPG) jumped more than 8% today after the troubled mall REIT reached an agreement to extend its forbearance agreements with certain lenders and noteholders for two more weeks which were set to expire tomorrow. WPG warned last month that it may restructure through a Chapter 11 bankruptcy proceeding. While higher-productive mall REITs like Simon Property (SPG) and Macerich (MAC) see stabilization in 2021, essentially all of the other smaller mall REITs face a potentially long and uncertain road to recovery.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.4% today and are now higher by 0.9% this week. Commercial mREITs gained 1.2% today, pushing their gains on the week to 2.2%. NexPoint Real Estate (NREF) gained 1.3% after announcing a senior note offering to fund additional investments. Dynex Capital (DX) gained 0.5% today after it declared a $0.13/share monthly dividend, in line with its previous rate, representing a forward yield of 8.0%.

REIT Preferreds & Bonds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.17% today, on average, but underperformed their respective common stock issues by an average of -0.14%. So far in 2021, REIT Preferred stocks are higher by 6.78% on a price-return basis and the average REIT preferred currently pays a dividend yield of 6.29% and trades at a slight discount to par value.

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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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