Real Estate Weekly Outlook
U.S. equity markets finished broadly lower on another volatile week, pressured by “supreme uncertainty” amid a contentious U.S. election season and lingering coronavirus concerns as we enter the colder months. Choppiness this week was fueled by concerns over the reimposition of lockdown measures in the U.K. amid an uptick in coronavirus cases in many European countries and dwindling expectations of a new round of fiscal stimulus following the death of Ruth Bader Ginsburg. Ahead of a critical week of employment data, reports late this week brought some glimmers of hope for a stimulus compromise.
(Hoya Capital Real Estate, Co-Produced with Brad Thomas)
Declining for the fourth straight week following a six-week winning streak, the S&P 500 ETF (SPY) dipped another 0.6% this week and is now roughly 8% below its recent all-time highs set last month. However, a late-week rally pulled the tech-heavy Nasdaq 100 ETF (QQQ) out of “correction territory” with gains of 1.8% this week. Real estate equities and other economically-sensitive equity sectors were among the laggards this week amid these renewed coronavirus concerns and stalled stimulus talks. The Equity REIT ETF (VNQ) finished lower by 3.1% with 17 of 18 property sectors in negative territory while the Mortgage REIT ETF (REM) dipped 6.1%.
Excluding the handful of technology names that dominate the large-cap indexes, it was a pretty ugly week of performance with just 2 of the 11 GICS equity sectors finishing in the green. The Energy (XLE) sector plunged more than 10% this week amid concerns over global economic growth while the Small-Cap (SLY) and Mid-Cap (MDY) indexes substantially underperformed the Large-Cap indexes. Underscoring the uncertainty and perhaps irrational trading patterns amid the choppiness of the past month, even another slate of stellar housing data wasn’t enough to lift the homebuilders and the broader Hoya Capital Housing Index out of the red despite multi-decade highs for both New and Existing Home Sales and record-low inventory levels.
While the rebound in the housing industry has shown continued resilience, there are signs that the rebound in labor markets may be losing some steam ahead of a critical week of employment data – the final jobs report before Election Day. Initial Jobless Claims remained stubbornly high at 870k, roughly steady with the levels over the last month. Continuing Claims, however, decreased another 200k to 12.6 million. Since the peak in Jobless Claims in early May, Continuing Claims have retreated by more than 12 million. In this coming week’s critical nonfarm payrolls report, economists are looking for employment gains of roughly 850k in August following July’s better-than-expected gain of 1.3 million and for the unemployment rate to tick down to 8.2%.
Real Estate Economic Data
Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.
Housing Continues To Be Bright-Spot of Recovery
This week, the Census Bureau reported that New Home Sales topped estimates, surging 43% in August from last year to the highest annual rate since 2006, another sign that the housing industry continues to lead the early post-pandemic economic recovery. Also this week, the National Association of Realtors reported that sales of Existing Homes rose by 10.5% from last year to the strongest sales pace in 14 years since December 2006. There are few signs of cooling in the red-hot housing market either, as the Mortgage Bankers Association reported that mortgage applications to purchase a single-family home rose again last week and are now higher by 25% from last year.
Ironically, one of the emerging constraints on the future upside in home sales amid this insatiable housing demand is the lack of available homes to sell. The supply of Existing Homes dipped 19.9% in August from last year, representing a 3.0-month supply at the current sales pace, the lowest in the survey’s history. The supply of Newly Built Homes, meanwhile, dipped 13% from last year with just 3.3 months of supply, the lowest on record going back to 1963. As forecast at the beginning of the pandemic, home prices have actually reaccelerated amid this favorable supply/demand dynamic with prices jumping 11.4% from last year on Existing Homes according to the NAR.
This week, we published Homebuilders: A V-Shaped Vendetta. An antihero of the prior financial crisis, Homebuilders have seemingly been on a vendetta over the last six months, asserting themselves as the unexpected leader of the early post-pandemic recovery. Homebuilders were slammed at the outset of the pandemic on fears that a coronavirus-induced recession could inflame a repeat of the Great Financial Crisis for the critical U.S. housing. Instead, the U.S. housing industry has roared back to life in recent months. New Home Sales, Existing Home Sales, and Home Prices have all seen a substantial reacceleration this year. The sharp rebound in housing market activity has been aided by longer-term macroeconomic trends of favorable millennial-led demographics, historically low housing supply, and record low mortgage rates.
Homebuilder earnings have been impressive nearly across-the-board since the start of the pandemic as most of the largest builders entered this period of uncertainty with a full head of steam. Commentary on earnings calls has been decidedly positive as recently-reporting builders – KB Home (KBH) and Lennar (LEN) – remarked that momentum has continued and even accelerated in late August and into early September, bucking the normal seasonal demand trends. Despite a weak start to Q2 in April and into May, homebuilders still reported a stellar 20% jump in net order growth, the most closely watched earnings metric. Housing remains an “unloved” sector despite the compelling long-term tailwinds at its back. Homebuilders trade at deeply discounted valuations to the S&P 500 despite their stellar growth rates.
Commercial Equity REITs
A reversal of the pattern last week within the commercial REIT sector, this supreme uncertainty weighed on the “shutdown sensitive” property sectors, which were slammed this week with more than a dozen REITs dipping by at least 10% on the week. Mall REITs including Pennsylvania REIT (PEI), Washington Prime (WPG), and CBL & Associates (CBL) were all lower by at least 15%, while small-cap shopping Center REITs – including Cedar Realty (CDR) and Acadia Realty (AKR) were also sharply lower. Manufactured Housing was the lone property sector in positive territory on the week.
While it was a more subdued week of REIT-related news flow than last week in the final weeks of Q3, we did see some notable dividend news and rent collection updates. Healthcare Trust of America (HTA) declared a $0.32/share quarterly dividend, a 1.6% increase from its prior dividend of $0.315, becoming the second healthcare REIT along with Alexandria Real Estate (ARE) to raise its dividend this year. After the Equity REIT sector was slammed by a wave of 64 dividend cuts in March through June, since then, we’ve seen far more dividend increases than dividend cuts in the REIT sector. We’ve now tracked 29 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates – primarily in the “essential” property sectors – technology, housing, and industrials – but other property sectors including net lease have come on strong of late.
On the other side, 64 equity REITs have reduced or suspended their dividend in 2020, including the entire hotel REIT sector and the vast majority of the retail REIT sector. As we highlighted last week, since the end of June, just three REITs have reduced or suspended dividends: prison REIT GEO Group (GEO), and office REITs Empire State Realty Trust (ESRT), and Vornado Realty (NYSE:VNO.PK). For REITs, the central theme that we’ve discussed extensively throughout the coronavirus pandemic is: for dividend-paying capacity, it all comes down to rent collection.
NAREIT released its monthly Rent Collection Survey this week which showed continued improvement across the surveyed sectors. Rent collection among net lease REITs has improved from around 70% in April to 95% in September. Collection rates among shopping center REITs have improved from below 50% in April to 82% by September. Apartment REITs continue to report rent collection around 96%. Net lease REIT STORE Capital (STOR), which raised its dividend last week, announced that it received 88% of rents in September and revised higher their collection rates for August and July to 87%, resulting in aggregate third-quarter 2020 cash rent collections of 87%, compared to 73% reported for the second quarter. Diversified REIT Armada Hoffler Properties (AHH) announced that it collected 100% of office rents, 95% of apartment REITs, and 90% of retail rents.
Skilled nursing REIT Omega Healthcare (OHI) finished lower by 4% this week after it announced that it is revising its method of accounting for lease-related revenue for tenants that have notified the company of potential bankruptcy risks. This change will result in “meaningfully lower” revenue in Q3, but cash rents, funds available for distribution, and cash flows won’t be affected. As we discussed in Healthcare REITs: Don’t Pull The Plug Yet, the pandemic further exasperates issues that skilled nursing REITs are facing with their troubled operators, but these operators have also been significant beneficiaries of government relief programs. Fellow healthcare REIT Ventas (VTR) is reportedly buying a $1 billion life sciences portfolio in San Francisco from Bain Capital in a relatively large move that will bolster the firm’s exposure to the faster-growing research and lab space subsector.
This week, we published Industrial REITs: Virus Exposes Frail Supply Chains. The “hub of e-commerce” and the hottest property sector of the last half-decade, Industrial REITs have been unfazed by the coronavirus-induced pain that has encumbered much of the REIT sector. The dramatic acceleration in e-commerce adoption has pulled forward the “retail apocalypse” trends as retailers divert more of their capital away from malls and into distribution supply chains. While much of the REIT sector was slashing dividends this year, nearly half of industrial REITs have raised dividends in 2020. Rent collection among industrial REITs has averaged more than 97% since April. With the pandemic exposing deficiencies in supply chains, we believe the logistics-boom is back in the early-innings.
Following strong gains of nearly 6% last week powered by a handful of dividend hikes, Residential mREITs dipped 4.0% this week while commercial mREITs finished lower by 3.9%. Two more mREITs increased their dividend this week, however, but each of their payouts remains below pre-pandemic levels. New Residential Investment (NRZ) was among the outperformers this week after it boosted its dividend by 50% while Western Asset Mortgage Capital (WMC) resumed its dividend with a quarterly payout of $0.05 per share, but still well below its pre-pandemic rate of $0.31 per share. The Company also provided an estimated GAAP book value per share of $3.31, an increase of 5% from the end of Q2.
Three other mREITs maintained dividends at prior levels. ARMOUR Residential REIT (NYSE:ARR) declared a $0.10/share dividend while PennyMac Mortgage (PMT) declared a $0.40/share dividend and Two Harbors (TWO) declared a $0.14/share dividend, all in line with last quarter but below their pre-pandemic rates. Hunt Companies (HCFT) and Arbor Realty (ABR) remain the only mREITs that have increased their dividend in 2020 to levels above 2019 payouts. 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.
Last quarter, we published REIT Preferreds: Higher-Yield Without Excess Risk. The InfraCap REIT Preferred ETF (PFFR) ended the week lower by 1.3% and is now lower by 12.9% on the year. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.8% higher in 2020 than their 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.
2020 Performance Check-Up
For the year, Equity REITs are now lower by roughly 20.3% and Mortgage REITs are off by 42.8% compared with the 2.1% gain on the S&P 500 and the 4.7% decline on the Dow Jones Industrial Average. Four of the eighteen REIT sectors are in positive territory for the year, while on the residential side, four of the eight U.S. housing industry sectors in the Hoya Capital Housing Index are in positive territory for the year. The gap between the best-performing REIT sector – data centers – and worst-performing REIT sector – regional malls – remains a whopping 75% in 2020. At 0.66%, the 10-year Treasury yield (IEF) has retreated by 126 basis points since the start of the year and is roughly 255 basis points below recent peak levels of 3.25% in late 2018.
Next Week’s Economic Calendar
Employment data highlights next week’s jam-packed economic calendar, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for employment gains of roughly 850k in August following July’s better-than-expected gain of 1.3 million and for the unemployment rate to tick down to 8.2%. We’ll see more housing data as well with Pending Home Sales on Wednesday along with the weekly MBA Mortgage Application data. We’ll also see Construction Spending data and Personal Income and Spending data on Thursday and a flurry of PMI data throughout the week.
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Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Index definitions and a complete list of holdings are available on our website.
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Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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