REITs Surge Amid Reopening Rally

Summary

• U.S. equity markets extended their reopening rally this week amid signs of an emerging "V-shaped" post-pandemic economic recovery juxtaposed with scenes of violence in the streets of major U.S. cities.
• The U.S. economy unexpectedly added 2.5 million jobs in May - the single-largest month of job growth ever - following two months of devastating job losses during the coronavirus-related shutdowns.
• Closing 42% above its lows in late March, the S&P 500 added another 4.9% this week while the Nasdaq climbed to fresh record-highs, a seemingly unfathomably feat back in March.
• Real estate equities have been among the biggest winners of the reopening rebound. Equity REIT ETFs gained another 10.9% this week, led by a 50% surge from mall REITs.
• The U.S. housing sector has foretold the emerging consumer-led rebound for several weeks. High-frequency data continues to indicate that the housing industry will be an early leader of the post-pandemic recovery.
• This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Weekly Outlook

U.S. equity markets extended their reopening rally this week amid signs that the post-pandemic economic rebound has formed the early contours of a V-shaped recovery following data that showed a stunning rebound in employment growth in May following a dismal March and April. The seemingly relentless equity market rally that pushed several major indexes to new record highs was juxtaposed with scenes of violence and unrest in the streets of many major U.S. cities and the receding coronavirus pandemic which was relegated out of the headlines for the first time in months as states and countries around the world continue to accelerate economic reopenings.

(Hoya Capital Real Estate, Co-Produced with Brad Thomas)

Closing more than 42% above its lows in late March, the S&P 500 ETF (SPY) added another 4.9% this week and is amazingly lower by just 1% for the year. The Nasdaq (QQQ), meanwhile, climbed to a new record high, a feat that was seemingly unfathomable amid the market chaos in late March. The bulk of the recent gains, however, have been driven by a rebound in the most-beaten-down segments of the equity market that were ravaged by the economic shutdowns. Real estate equities have been among the biggest winners of the sooner-than-anticipated rebound as the broad-based Equity REIT ETFs (VNQ) (SCHH) surged another 10.9% this week following last week's 7.0% gain, led by double-digit percentage gains from 11 of the 18 property sectors.

Indications of a potential V-shaped recovery have been brewing for several weeks now in the U.S. housing sector, as high-frequency housing data has been foretelling a stronger-than-expected consumer-led rebound in May. The Hoya Capital Housing Index jumped another 11.3% this week, led by a continuation of the rally in homebuilders and strength among residential REITs that reported stronger-than-expected rent collection metrics during the annual REITweek conference. All 11 GICS equity sectors ended the week in the positive territory, led by double-digit percentage gains from the economically-sensitive Energy (XLE), Financials (XLF), Industrials (XLI) sectors while Small-Cap (SLY) and Mid-Cap (MDY) stocks extended their furious rebound, surging by 12.2% and 8.4%, respectively.

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.

This week's gains were bolstered by a highly encouraging slate of employment data, capped off by the stunning BLS nonfarm payrolls report on Friday. The U.S. economy unexpectedly added 2.5 million jobs in May - the single-largest month of job growth ever - following two months of devastating job losses during the coronavirus shutdowns. Economists were expecting up to 8 million additional job losses in May, and while we've been highlighting for several weeks that higher-frequency data - specifically continuing jobless claims, commentary from corporations, and mobility data - has indicated that millions of temporarily-unemployed Americans have indeed returned to work over the last several weeks, we had not expected job growth to turn positive until the June jobs report. Among the 17.8 million Americans currently unemployed, 84% of these individuals are still classified as on "temporary layoff" suggesting that the rebound in job growth could be even more significant in June.

While some pundits remained highly skeptical of the recent jaw-dropping rally citing ugly backward-looking metrics, we've discussed how obvious signs of strength in high-frequency housing data should not be overlooked considering the absolute importance of the "housing economy" on the broader U.S. economy. The Mortgage Bankers Association reported this week that mortgage applications to purchase a home - a leading indicator of existing home sales - rose for the 7th straight week and are now 18% higher from the same week last year compared to the 35% decline in early April. This follows data last month from Redfin (RDFN) which showed that homebuying demand is now 16.5% above pre-coronavirus levels while Zillow (Z) reported a 50% surge in pending home sales over the last month and that activity on their site is back to pre-pandemic levels.

As we pointed out last week, helping to stabilize the U.S. economy - and laying the seeds to the rebound in housing market activity - has been the unprecedented level of fiscal stimulus sent directly to millions of households through the combination of direct checks and unemployment benefits that grant many Americans more total monthly income than their prior salaries. We continue to emphasize that it is difficult to envision the "depression-like" economic environment forecasted by some analysts without first seeing substantial instability in the housing market. While very early in the economic recovery, we're so far observing quite the opposite as the combination of favorable millennial-led demographics, record-low mortgage rates, and a substantial undersupply of housing units after a decade of historically low levels of new construction continue to be relentless tailwinds.

Commercial Real Estate

The double-digit percentage gain from the equity REIT sector this week came during the industry's annual REITweek conference, held "virtually" this year, where we heard interim updates on May rent collection metrics and commentary regarding "on-the-ground" fundamental trends from several dozen REITs and expect more reports to trickle out in the weeks ahead. These updates have so far been quite positive with most REITs reporting similar or stronger collection rates in May as in April while bigger-picture commentary has generally been quite optimistic. "Essential" property sectors including housing, industrial, and technology REITs, along with self-storage and office REITs, all reported collection of more than 90% of rents in April and May.

Capturing the headlines this week, however, was the incredible 50% surge from the beaten-down mall REIT sector, which was the single-largest weekly percentage gain for any major REIT property sector on record. Simon Property (SPG) jumped more than 54% this week, but somehow still didn't manage to crack the top-10 list of strongest performers as several REITs including Cedar Realty (CDR), Seritage Growth (SRG), and Hersha Hospitality (HT) nearly doubled this week. The rebound came after extremely encouraging reports on rebounding demand from mall-based tenants including American Eagle (AEO), Abercrombie & Fitch (ANF), and Cheesecake Factory (CAKE), which reported that it has already recaptured 75% of sales. Meanwhile, data from Visa (V) showed that payment volume was lower by only 5% in May from last year compared to the 18% dip in April.

The sharp rebound in hotel and casino REITs was driven by data from STR showing that hotel occupancy climbed for the seventh-straight week while the Global Airline ETF (JETS) surged more than 30% on news that major U.S. carriers plan to add flights in response to strengthening travel demand. Host Hotels (HST) noted that it believes that occupancy declines caused by the COVID-19 pandemic hit bottom in April, noting that demand has started to pick up in some markets. VICI Properties (VICI) announced that it collected 100% of rent for the month of May and anticipates collecting all rent due for the month of June. While 2020 may have more craziness still to come including a presidential election in November, it appears that this time was indeed "different" than the prior recession for the commercial real estate sector as equity REITs have rebounded nearly 50% from their lows in March.

Last week, we published Dividend Cuts And Overdue Rent: REIT Earnings Recap where we discussed fundamental trends observed in first-quarter earnings reports. 2020 was poised to be a solid year of growth for REITs prior to the pandemic, but even with a faster-than-expected reopening, fundamental metrics including same-store NOI growth and FFO growth are likely to be the weakest since at least 2009, but several property sectors should be relatively immune from the downturn. Economic shutdowns ravaged the economically-sensitive property sectors and punished highly-levered REITs, but so far we haven't seen any true "fireworks" thus far. We have tracked 52 equity REITs - primarily retail and lodging REITs - out of our universe of 165 equity REITs that have now announced a cut or suspension of their common dividends.

Mortgage REITs & REIT Preferreds

There have been plenty of fireworks this year in the Mortgage REIT (REM) sector, however, which remains lower by roughly 40% this year despite an 85% recovery from the dreadful lows in early April. Residential mREITs surged another 18.3% this week while commercial mREITs jumped 20.7% In our Earnings Recap published last week, we noted that Residential mREITs were the hardest-hit real estate sector during the depths of the pandemic, but have seen conditions stabilize considerably in recent weeks amid signs of stabilization in the mortgage markets. Commercial mREITs weren't facing the same "existential crisis" as their residential mREIT peers, but the sector's heavy exposure to the hotel, office, and retail sectors has dragged on performance until the rebound in these sectors over the past several weeks.

Encouragingly, the number of Americans seeking forbearance on their mortgages dropped for the first time since the start of the pandemic this week according to data from Black Knight, which showed that 4.73 million loans are currently in forbearance, down from 4.76 million last week, representing an 8.9% share of all mortgages. The total number of homeowners seeking forbearance appears to have topped-out well below 5 million, which represents 9% of all active mortgages, which would be well below the expectations of some pundits who expected up to 25% of mortgages to enter forbearance. Additionally, a recent survey from LendingTree found that the majority of borrowers chose to enter forbearance not out of necessity, but because it was offered and available without any apparent penalty under the CARES Act.

The REIT Preferred ETF (PFFR) ended the week higher by 4.8%, driven by strong gains from the preferred issues from lower-productive mall REITs including CBL & Associates (CBL), Pennsylvania REIT (PEI), and Washington Prime (WPG) along with several hotel REITs including Sotherly Hotels (SOHO) and Ashford Hospitality (AHT). Among REITs that offer preferred shares, the performance of these securities has been an average of 13.3% 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.

This week, we published REIT Preferreds: Higher-Yield Without Excess Risk where we introduced our all-new REIT Preferred and Bond Tracker and discussed the investment characteristics of these "hybrid" securities. We pointed out that total returns of REIT preferreds have lagged the REIT common stock index, but REIT preferreds have exhibited significantly lower volatility, translated into risk-return ratios nearly on par with - but still slightly inferior to - REIT common shares. A somewhat esoteric segment of the REIT investment landscape - but an under-the-radar favorite among yield-focused REIT investors - the usage of preferred equity within a REIT's capital stack has waxed and waned over time depending on prevailing capital market conditions, but currently about a quarter of equity REITs and the majority of mortgage REITs currently have active preferred or "baby-bond" securities.

2020 Performance Check-Up

REITs are now lower by roughly 11.4% this year compared with the 0.8% decline on the S&P 500 and 4.8% decline on the Dow Jones Industrial Average. Consistent with the trends displayed within the REIT sector, mid-cap and small-cap stocks continue to underperform their larger-cap, although this underperformance gap has closed significantly in recent weeks. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as industrial REITs joined data centers and cell tower REITs as the lone real estate sectors in positive territory for the year, residential REITs have also delivered notable outperformance. At 0.90%, the 10-Year Treasury Yield (IEF) has retreated by 102 basis points since the start of the year and is roughly 235 basis points below recent peak levels of 3.25% in late 2018.

Next Week's Economic Calendar

It'll be a relatively busy week of economic data, highlighted by CPI inflation data on Wednesday and PPI inflation data on Thursday. We'll hear from the Federal Reserve on Wednesday, where we'll be listening for any change in tone or rhetoric from Fed Chair Powell regarding the unprecedented levels of monetary support and emergency actions over the past several months. Continuing jobless claims will also continue to be our focus for indications that temporarily-unemployed Americans are returning to work.

If you enjoyed this report, be sure to "Follow" our page to stay up to date on the latest developments in the housing and commercial real estate sectors. For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Healthcare, Industrial, Data Center, Malls, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Real Estate Crowdfunding, and REIT Preferreds.

Analyst’s 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.

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. All commentary published by Hoya Capital Real Estate is available free of charge and is for informational purposes only and is not intended as investment advice. 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. Hoya Capital Real Estate advises an ETF. In addition to the long positions listed above, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com.

Comments

[Tellurium128]

Mall REITs stock rally defies logic. Their tenants arent paying their rents and the tenants customers want to burn down the stores and malls. On top of that there is no way in the world commercial real estate is worth what it was prior to covid and lenders are much more cautious lending to businesses now let alone retail properties and landlords which will be stuck with higher insurance costs because of the riots nd looting.
Half of the shelves in the few stores that are open now are empty and i now find myself going to amazon becuase im sick of driving around 3 or 4 locations to find what im looking for.
The whole retail sector stinks and i think mall REITs will fare the worst from here on.

[Hoya Capital]

Simon is still down 40% YTD while the other mall REITs are down upwards of 70%. The sector was essentially priced for bankruptcy in April, so the recent mall REIT rally doesn't seem to be entirely unjustified.

[Diesel]

REITs are going back to all time highs as I've been saying for the last couple months.

[1winner]

Long VTR to $60....easy $

[fasthandssam]

Riding MAC, SPG, and HT to the top!

[Charlie's Munger]

$SRG I booked ~ 50% gain last couple of weeks while you were being skeptical lol

[Rob G. in Vegas]

Not sure if you cover Plymouth Industrial REIT (PLYM), but they cut their quarterly dividend from $.375/share to $.20/share. Just an FYI. It was a good move, as the company was not funding it with AFFO.

The one and only industrial REIT so far that has cut.

[Hoya Capital]

Thanks, @Rob Grande. Somehow missed that in PLYM's earnings report, appreciate it!

[Fernando1984]

Let's go $SRG

[svetlanakhachaturyan1]

You can say that riots is a very visible sign that the lockdown is over. Lockdown was prohibition of assembly, and here finally during the riots people assemble freely like always before and no one is thinking of COVID once again, neither the rioters nor the government So we can well argue the market is up thanks to the riots.
In addition, one mass hysteria, the virus hysteria is supplanted by another mass hysteria, antiracism, antifa and equality mass hysteria. The latter one is not so threatening to business as not all businesses are looted now, while all businesses had to remain closed during the lockdown. So thanks to the antifa, US is finally open for business, contrary to what they were planning!

[sbrn]

I’m a nurse by profession. I worked my ass off taking every extra shift I could for years. I paid off 107k in student loans. I was so broke that I couldn’t even afford to go out and grab a drink with my friends for years. I also have a debilitating auto immune disease that started 10 years ago. I never thought I’d see the day when that turned around, but I kept trying regardless.

Because of my “job security,” even though my hours were cut during this crisis, I kept investing, and primarily in the unnecessarily beaten down reits you write about.

I finally feel like I’ve gotten to the point where I have an edge in life, despite everything. I now have monthly income, that I’ll never sell, and feel comfortable finally starting a family.

Thank you for your articles. They really helped me, and I sincerely mean that.

[Locomotivus]

this is the most inspiring post i have ever seen in SA. amazing.

[Hoya Capital]

Really appreciate it, @sbrn. Keep up the great work and fighting the good fight!

[Guy at Work reading SA]

@sbrn - I can't help but feel sorry for you. You dedicate your life to helping others, getting screwed over in the process. I'm an RT living in Canada, graduated at 20 with NO DEBT and a degree in health sciences, this is Canada where it makes sense to go to school to help others. Couldn't imagine being a healthcare worker in the states, where they make you work with vulnerable patients without PPE. Every single year, I'm so much more thankful to be Canadian. Can't help but feel sorry for the states as a whole now...

[Guy at Work reading SA]

V shaped recovery? Nasdaq says so but not the employment numbers don't. I'm thinking it's another good time to raise cash.

[coppertj]

Just remember unemployment numbers are backwards looking lagging indicators.

[Hoya Capital]

@Guy at Work reading SA Certainly reasonable to believe there's more craziness in store for the rest of 2020.

The range of estimates for full-year GDP growth for 2020 is as wide as it's ever been. At this point, it's not out of the realm of possibility that we'll see *positive* growth in 2020 and perhaps to a large degree.

Even without considering any sort of Keynesian multiplier effect we're adding $3-5 trillion in stimulus to a $20 trillion economy that may have only lost $1 trillion or less in aggregate real output from the coronavirus shutdowns.

[MLian]

Great summary of the V-shape in progress.

[Hoya Capital]

Thanks, @MLian.

[Value Sea]

The question is whether such a rally can sustain in the next few weeks/months?
Is the fundamental finally changed?

[usiah]

Thank you for your always informative weekly REIT reports, Hoya Capital.

Retired income investor

[Hoya Capital]

Thanks, glad you enjoyed @usiah.

[Skeptical Sam]

This is welcome news. But let's wait at least until mid-fall to talk seriously about a V-shaped recovery. We will know more about the pandemic's lasting impact on the unemployment rate and on GDP by then too.

[Hoya Capital]

Thanks, @Skeptical Sam and I agree that the recovery will certainly be uneven and that surely some permanent damage has been done.

We're been pretty consistent that *if* the shutdowns last for weeks rather than months (as it appears to be the case at this point), the permanent economic damage *can* be minimized but not entirely eliminated.

[stvgeue]

Also, In a couple of weeks we will have an idea how lack of social distancing during mass protests effects uptick in transmissions or outbreaks. A really positive report would indicate a smoother recovery especially in light of the fact that a vaccine is being expedited.

[retbiotech1]

Unfortunately, reports from the department of labor indicate that there was a mis categorization of some of the data and the real unemployment number is around 16%. I suspect that the data will be corrected this week and the market may not be quite so exuberant. I used Friday to trim positions and take double digit gains across the board. I expect the market will experience significant volatility as economic numbers vary. However, it's a market of stocks so there is usually opportunity.

[jimoc]

Ah yes I recall how the unemployment numbers dramatically fell right before the re-election of O. It was an impossible improvement and of course the media mostly ignored it.

[retbiotech1]

Current numbers had nothing to do with Trump just like the former had nothing to do with Obama. I don’t believe labor dept was corrupted in either case. One can differ with their data collection, but there’s no political conspiracy at labor.

[Hoya Capital]

@retbiotech1 Unfortunately I'm seeing this misinformation spread, citing a Washington Post article that will likely be retracted once it has already its intended effect of seeding doubt in data that is politically inconvenient. A sad state of modern journalism, but that's a whole separate issue.

The data will not "be corrected this week." The BLS runs two separate surveys in the nonfarm payrolls report: the establishment survey and the household survey. The "headline" number of job growth comes from the establishment survey while the unemployment rate comes from the household survey.

The BLS has been transparent about potential classification/coding issues of COVID-related layoffs on the household survey. This occurred both in April and May. The U3 UR would have been at 19.7% in April then fallen to 16.4% in May if the workers who were recorded as employed but absent from work due to "other reasons" (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff.

Bottom line, it's extremely disappointing that many folks that *should* know better (including a Nobel laureate) are using this situation in bad faith to challenge the legitimacy of the BLS.

[TION]

This is all good but what about the coming correction of 4.9 million uncounted unemployed! What about the eminent resurgence of Covid! Florida cases are booming just weeks after reopening! I warned several people to ignore that phoney jobs report only because the data is useless at this point in time! You are going to have a correction Monday of a 2.8 million job loss, what then?

[Hoya Capital]

Respectfully, it's hard to tell if this is sarcasm/parody.

[housedr]

Asteroid to strike Wed.

[jimoc]

tion,
something that is phony; a counterfeit or fake. an insincere, pretentious, or deceitful person: He thought my friends were a bunch of phonies.

do you prefer potato or potatoe

sorry you missed out. If what you say is true the cnbc gang will all over it as they have your agenda too