REITs Back On Top
- U.S. equity markets were mixed on a volatile holiday-shortened trading week as renewed concerns over the spread of COVID variants and downbeat economic data pulled global sovereign yields to five-month lows.
- Climbing for the third-straight week and closing at record highs, the S&P 500 gained 0.4%, but the Mid-Cap 400 and Small-Cap 600 each declined for the second-straight week.
- Led by residential REITs, real estate equities stayed red-hot this week and are now the best-performing major asset class this year with total returns of nearly 25%.
- Apartment rents are soaring at the fastest pace on record, and fresh data this week showed an acceleration into late June with rents increasing by 2.3% nationally, pushing the year-to-date gains to a 'staggering' 9.2%.
- Help Wanted! Job openings climbed to record-highs in May as employers struggle to offer competitive wages relative to generous unemployment benefits offered by the state and federal government.
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Real Estate Weekly Outlook
U.S. equity markets were mixed on a volatile holiday-shortened trading week as renewed concerns over the spread of COVID variants and downbeat economic data pulled global sovereign yields to five-month lows. While COVID cases remain on the decline in the U.S. - which continues to lead the world in vaccine distribution - worldwide cases have inflected higher once again, prompting a bid for risk-free bonds and "stay at home" equity sectors.
(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)
Climbing for the third-straight week and closing at record-highs, the S&P 500 (SPY) gained 0.4% on the week, but the Mid-Cap 400 (MDY) and Small-Cap 600 (SLY) each declined for the second-straight week, retreating 0.1% and 0.8%, respectively. Led by residential REITs, real estate equities stayed red-hot and are now the best-performing major asset class this year with total returns of nearly 25%. The Equity REIT Index (REIT) finished higher by 2.5% this week with 17 of 19 property sectors in positive territory while the Mortgage REIT Index (REM) gained 0.2%.
All eyes were on the sovereign bond markets this week as the 10-Year Treasury Yield briefly dipped below 1.25% - the lowest level since early February - amid ongoing COVID concerns and following a relatively weak slate of PMI and jobless claims data, pulling the Economic Surprise Index to the lowest level since early in the pandemic. Eight of the eleven GICS equity sectors finished higher on the week while fresh data showing historically strong - and accelerating- rent growth lifted residential REITs and the broader Hoya Capital Housing Index to gains as mortgage rates retreated to five-month lows, setting the stage for a strong back-half of the year for the broader housing industry.
Real Estate Economic Data
Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.
Help Wanted! Job openings climbed to record-highs in May as employers struggle to offer competitive wages relative to generous unemployment benefits offered by the state and federal government. According to fresh JOLTs data this morning from the Bureau of Labor Statistics, U.S. businesses posted 9.21 million job openings last month - a quantity essentially even with the total number of unemployed Americans - which marked the fifth straight month of increases. Shortages may be easing, however, as the BLS reported last week that hiring accelerated in June as additional states have begun to phase out the supplemental pandemic-related unemployment benefits.
Equity REIT Week In Review
Shopping Centers: The animal spirits remain alive across the REIT universe with a flurry of M&A and IPO activity over the last three months. Non-traded REIT Phillips Edison & Company plans to pursue an initial public offering of 17 million shares priced at a range of $28 to $31 per share, implying a market capitalization of roughly $3.4B, which would make it the sixth-largest shopping center REIT. PECO is an internally-managed REIT and one of the nation’s largest owners and operators of grocery-anchored shopping centers with a portfolio comprised of 278 wholly-owned shopping centers across 31 states.
Apartments: As discussed last week in Rents Roar as Hiring Rebounds, apartment rents are soaring at the fastest levels on record, and fresh data this week from Apartment List confirmed that the acceleration actually picked up pace into late June. Lifting the apartment REIT sector to gains of nearly 5% on the week, led by sunbelt-focused Mid-America Apartments (MAA) and Camden Property (CPT), the data provider noted that rents increased by 2.3% in June (a 27.6% annualized rate) and noted that "So far in 2021, rental prices have grown a staggering 9.2%. To put that in context, in previous years growth from January to June is usually just 2-3%."
Single-Family Rental: The red-hot Sunbelt markets continue to lead the surge, powering gains of 5% this week for SFR REITs Invitation Homes (INVH) and American Homes (AMH), as a handful of markets - including Spokane, WA which recorded an 8.1% increase in June alone - have recorded rent growth above 25% through the first half of 2021. Rents in the hard-hit urban markets have also exhibited a sharp rebound since bottoming in early 2021. Rents in San Francisco, for example, are still 14% lower than they were in March 2020, but rents have increase by 17% since January of this year. Apartment List notes, "Nationally, rents have now surpassed the level where they would have been if rent growth had not been disrupted by the pandemic."
Cannabis: As discussed this week in High On Growth, Cannabis REITs - Innovative Industrial (IIPR), Power REIT (PW), and AFC Gamma (AFCG) - are riding a seemingly never-ending 'high' since bursting onto the scene in the late 2010s, thriving in the murky and often contradictory regulatory framework of legalized marijuana. While still early in the evolution of the industry, we see emerging parallels with the casino industry where REITs have carved out a profitable and attractive niche with a sustainable competitive advantage. Medical marijuana usage is now legal in 36 states while recreational usage is legal in 18 states following a burst of activity this year which has seen five additional states legalize weed: New Jersey, New York, Virginia, New Mexico, and Connecticut.
Industrial: Terreno Realty (TRNO) gained more than 3% on the week after providing preliminary Q2 earnings results in which it noted that its portfolio is now 97.5% leased, up from 96.1% in the prior period. Cash rents on new and renewed leases increased 21.1% with a tenant retention ratio of 64.3% in Q2. Terreno noted that it acquired six properties and three improved land parcels in Q2 for an aggregate purchase price of $54.2M and it has $146.6M of acquisitions under contract. The "hub of e-commerce" and the hottest property sector of the last half-decade, industrial REITs recorded the strongest earnings and dividend growth of any real estate sector in 2020.
Hotel: Ashford Hospitality (AHT) slid more than 40% this week after providing a business updating and announcing a 1-for-10 reverse stock split that will be effective on July 16th. AHT reported that its RevPAR in June was down 37% compared to 2019 levels, a mild sequential improvement from May when RevPar was 47% below 2019 levels. For the full Q2 period, AHT recorded RevPAR that was 46% below 2019-levels. Braemar Hotels (BHR) - which is also externally advised by Ashford (AINC) - reported comparatively better data wit June RevPAR lower by 15% from 2019 while May was 25% below 2019-levels. For the full Q2 period, BHR recorded RevPar that was 20% below 2019-levels. Last week, STR reported that gross operating profit for U.S. hotels reached 70% of the comparable 2019 level in May, on average.
Malls: Authentic Brands, which is Simon Properties' (SPG) joint-venture partner on the SPARC Group, filed for an IPO this week, planning to trade on the NYSE under ticker symbol AUTH. Through the SPARC Group, SPG and AUTH own owns brands such as Eddie Bauer, Brooks Brothers, Lucky Brand, Nautica, Aéropostale, and Forever 21. Mall REITs are looking to regain their footing after reporting historic plunges in Funds From Operations ("FFO") and Net Operating Income ("NOI") in 2020. Post-pandemic economic reopening and improving rent collection rates have given investors some reason for optimism recently as the sector reported collection rates improving in Q1.
Healthcare: This week, we published Healthcare REITs: Vaccine Revival. Left for dead early in the pandemic, the prognosis for Healthcare REITs has improved dramatically over the several quarters as coronavirus cases have been all-but-eradicated in U.S. senior housing facilities. Senior Housing REITs - the hardest-hit sub-sector - have led the recovery as occupancy rates appear to have bottomed in early 2021, benefiting from the red-hot and undersupplied housing market. While HealthPeak (PEAK) has completed its exit from the senior housing sector to focus on medical office and lab space, Welltower (WELL) and Ventas (VTR) are doubling down with major senior housing portfolio acquisitions last month.
Mortgage REIT Week In Review
Mortgage REITs used a late-week rally to erase their earlier losses as commercial mREITs finished the week higher by 0.5% while residential mREITs finished with modest 0.3% declines. iStar Inc. (STAR) gained nearly 10% after announcing it will shop around its net lease assets for a potential sale- a portfolio comprised of 19 million square feet of office, retail, and industrial properties. Ellington Financial (EFC) was the laggard on the week following a secondary common stock offering of 6M shares at $18.22/share and plans to use the proceeds to acquire additional assets.
REIT Preferreds & Capital Raising
The InfraCap REIT Preferred ETF (PFFR) was lower by 0.2% this week but remains higher by 5.3% thus far in 2021. It was a quiet week of preferred issuance or redemptions, but New York Mortgage Trust's (NYMT) new 6.875% Series F Fixed-to-Floating Preferred (NYMTL) began trading on Nasdaq this week while Sachem Capital's (SACH) new 7.75% Series A Cumulative Preferred (SACH.PA) began trading on NYSE. The average REIT preferred pays a current yield of 5.94% and trades at a slight premium to par value.
Over in the bond markets, Realty Income (O) priced its debut green bond offering of £400M of 1.125% senior unsecured notes due July 2027 and £350M of 1.750% senior unsecured notes due July 2033. STAG Industrial (STAG) priced $275M of 2.80% notes maturing September 2031 and $50M of 2.95% notes maturing September 2033. Arlington Asset Investment (AAIC) priced $33.5M of 6.00% senior notes due 2026. Retail Properties of America (RPAI) closed on an extended $850M (from $750M) unsecured revolving line of credit due January 2026. In the most recent quarter, debt as a percent of enterprise value for the average REIT retreated back down below 33% by the end of Q1 after briefly climbing above 40% during the March sell-off.
2021 Performance Check-Up
As we pass the halfway point of 2021, Equity REITs are higher by 23.7% this year while Mortgage REITs have gained 16.5%. This compares with the 16.5% advance on the S&P 500 and the 17.4% gain on the S&P Mid-Cap 400. All nineteen REIT sectors are now in positive territory for the year, while on the residential side, all eight sectors in the Hoya Capital Housing Index are higher. At 1.36%, the 10-year Treasury yield has climbed 44 basis points since the start of the year and is 84 basis points above its all-time closing low of 0.52% last August, but 189 basis points below its 2018 peak of 3.25%.
With the strong gains this week, REITs are now the best performing asset class this year, jumping over the Commodities (DJP) and Small-Caps (SLY) this week. Despite the rough 2020 in which REITs were the worst-performing asset class, REITs are still the fourth best-performing asset classes since the start of 2010, producing average annual total returns during this time of 11.8%. REITs lag only Small-Cap, Mid-Cap, and Large-Cap equities over this time, producing far superior total returns to Bonds (AGG), TIPS (TIP), Commodities, Emerging Markets (EEM), and International (EFA) stocks.
Economic Calendar In The Week Ahead
We'll see a jam-packed slate of economic data and the start of second-quarter earnings season in the week ahead, headlined by inflation and retail sales data. On Tuesday and Wednesday, respectively, we'll see Consumer Price Index ("CPI") and Producer Price Index ("PPI") data for June. The BLS reported last month that consumer and producer prices each recorded the largest annual increases in more than a decade. On Friday, we'll see Retail Sales data for June which is expected to show a continued cool down from the stimulus-fueled record-highs set in April. We'll also be watching Jobless Claims data on Thursday and Consumer Sentiment data on Friday.
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, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Cannabis, High-Yield ETFs & CEFs, REIT Preferreds.
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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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