• Alex Pettee, CFA

WeWork SPAC • REITs Rally • Mortgage M&A

Summary

  • U.S. equity markets ended a choppy week with broad-based gains on Friday after economic data showing cooler-than-expected inflation in February which calmed some concerns about an overheating economy.

  • Pushing its weekly gains to 1.7%, the S&P 500 gained 1.6% today while the Dow Jones Industrial Average jumped 453 points. The tech-heavy Nasdaq 100 finished higher by 1.5%.

  • Real estate equities were among the leaders for the second-straight day as the broad-based Equity REIT ETFs gained 2.2% with all 19 property sectors in positive territory.

  • Take Two? Following a botched IPO in 2019, co-working firm WeWork is reportedly planning to go public through a merger with special purpose acquisition company BowX Acquisition.

  • Annaly Capital (NLY) - the largest residential mREIT - gained 1.2% today after it announced yesterday afternoon that it will sell its commercial real estate business to Slate Asset Management.

Real Estate Daily Recap

U.S. equity markets ended a choppy week with broad-based gains on Friday after economic data showing cooler-than-expected inflation in February which calmed some concerns about an overheating economy. Pushing its weekly gains to 1.7%, the S&P 500 ETF (SPY) gained 1.6% today while the Dow Jones Industrial Average (DJI) jumped 453 points. The tech-heavy Nasdaq 100 (QQQ) finished higher by 1.5%. Real estate equities were among the leaders for the second-straight day as the broad-based Equity REIT ETFs (VNQ) gained 2.2% with all 19 property sectors in positive territory while the Mortgage REIT ETFs (REM) gained 0.6%.

Bad News is Good News Again? Curbing fears of "overheating" from the combination of stimulus and vaccine-driven reopenings, softer-than-expected economic data this week seemed to come as a mild relief to investors. After climbing for seven straight weeks, the 10-Year Treasury Yield ended the week at 1.66%, down 7 basis points from last week despite the tick higher on Friday. Ten of the eleven GICS equity sectors finished in positive territory today, led to to the upside by the Technology (XLK) and Materials (XLB) sectors while homebuilders and the broader Hoya Capital Housing Index delivered strong gains as well after data from Redfin (RDFN) showed that housing demand has shown no signs of cooling despite limited supply.


Commercial Equity REITs

Office: Take Two? Following a botched IPO in 2019, co-working firm WeWork is reportedly planning to go public through a merger with special purpose acquisition company BowX Acquisition in a deal that values the coworking office space company at $9 billion. WeWork will raise $1.3 billion in cash as part of the deal, including $800 million in private investment from firms including Insight Partners, Fidelity Management and Starwood Capital Group. As discussed in Office REITs: The New Normal, co-working firms are far more "friend than foe" for office REITs. Before the pandemic, co-working had been one of the more significant demand drivers over the past half-decade for office space, responsible for almost a third of total leasing activity.

WeWork is entering a far more uncertain market environment than existed during its initial attempt at going public in 2019. A year into the pandemic, office utilization in major U.S. cities remains a fraction of pre-pandemic levels with coastal cities facing a particularly slow recovery. Survey data indicates that workplace flexibility is popular among both employees and executives. While the office isn't going away, corporations expect to scale back their real estate footprint. We believe that dense coastal office markets with transit-heavy commutes will struggle in the new normal.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.6% today but finished the week lower by 1.1%. Commercial mREITs gained 0.7% but closed the week with declines of 1.4%. Annaly Capital (NLY) - the largest residential mREIT - gained 1.2% today after it announced yesterday afternoon that it will sell its commercial real estate business to Slate Asset Management in a transaction valued at $2.33B. Annaly expects the transaction to have an immaterial impact on key financial metrics, including book value, core earnings, and the company’s dividend.

REIT Preferreds

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.20% today, on average, but underperformed their respective common stock issues by an average of 0.95%. So far in 2021, REIT Preferred stocks are higher by 5.24% on a price-return basis. The average REIT preferred currently pays a dividend yield of 6.36% 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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