U.S. equity markets declined for the second-straight week while volatility measures soared to the highest levels this year as jittery investors attempted to evaluate and price the economic impacts of the Omicron variant. Despite a solid slate of employment and housing data and an apparent compromise to avoid a looming government shutdown, Omicron concerns and escalating tensions with China sent the commodities tumbling and sent the 10-Year Treasury Yield to the lowest level since mid-September.
Following declines of over 2% last week and suffering the worst two-day decline since October 2020, the S&P 500 (SPY) slipped another 1.2% on the week while the MidCap 400 (MDY) dipped 2.7% and the Small-Cap 600 (SLY) declined 2.4%. The tech-heavy Nasdaq-100 (QQQ) dipped more than 2% with China-exposed companies posting sharp declines. Buoyed by a wave of dividend increases and helped by their pure-play domestic focus, real estate equities were among the strongest performers this week. The Equity REIT Index ended the week off by just 0.2% with 7-of-19 property sectors in positive territory while the Mortgage REIT Index finished lower by 2.0%.
While early indications out of South Africa suggest that the new variant may be less virulent than past varieties, investors remained concerned over the government response, and market trends this week were indicative of expectations that the U.S. will avoid the type of economic restrictions faced in Europe and Asia. With the outlook for economic growth and inflation suddenly in doubt, fixed income investors were not buying the seemingly hawkish tack from Fed Chair Powell, who noted that the "risk of higher inflation has increased" and signaled that the Fed would consider quickening the pace of tapering. Domestic-focused and yield-sensitive sectors were the leaders this week including Utilities (XLU), Commercial Real Estate (XLRE), as well as homebuilders and the broader Hoya Capital Housing Index.
Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.
Following a better-than-expected slate of New and Existing Home sales data last week, the positive momentum continued this week as the NAR reported that Pending Home Sales jumped 7.5% in October, well above the consensus estimate for a 0.7% increase with every region reporting an increase in pending sales. Meanwhile, Case Shiller Home Price Index data showed that national home prices rose 19.5% in September - down from 19.8% in August - which snapped a streak of 15 consecutive months of sequential acceleration in the year-over-year growth rate. After the breakneck surge in housing market activity in early 2021 and subsequent summer cooldown, recent data indicate that conditions have settled into a more sustainable positive trajectory.
While the U.S. housing industry continues to exhibit resilient strength, employment data this past week painted a murkier picture. Following a strong nonfarm payrolls report in the prior month, the Bureau of Labor Statistics reported this week that the U.S. economy added just 210k jobs in November - well below the consensus expectations of 570k. The prior two months were revised higher by a combined 82k, however, and the relatively weak "headline" number followed better-than-expected ADP Payrolls report data in the week and a continuation of solid trends in Jobless Claims data. Employment has increased by 18.5 million since April 2020 but is still down by 3.9 million, or 2.6%, from its pre-pandemic level in February 2020.
As has been the case throughout much of the year, beneath the headline numbers which are derived from the Establishment Survey, the Household Survey painted a far brighter picture showing accelerating employment gains and a return of workers to the labor force. The unemployment rate - which is derived from the household survey - fell to 4.2%, a 0.4% percentage point decline while the labor force participation rate increased to 61.8% in November, but this is still a rather large 1.5 percentage points below pre-pandemic levels, representing 5-8 million Americans. A critical question to determine the path of inflation and interest rates relates to how much "slack" remains in the labor market and what it will take to pull the millions of workers that departed the labor force during the pandemic back into the fold.
Diving deeper into the data, it becomes apparent that the hiring slowdown picked up in the establishment survey can be traced almost exclusively to a slowdown in COVID-sensitive sectors: retail and leisure/hospitality. Total employment in retail trade declined by 20k in November as job losses in department and clothing stores were partially offset by hiring in home improvement stores while hiring in leisure and hospitality slowed significantly from the 150k average over the prior two months to just 23k in November. Notable job gains were seen in professional and business services, transportation and warehousing, construction, and manufacturing.
With the countdown to Christmas now officially underway, Santa delivered some early presents for REIT investors this past week. Four REITs declared special dividends this week while five REITs also hiked their regular distribution rates. Industrial REIT EastGroup Properties (EGP) rallied 2.5% this week after it announced a 22.2% increase in its quarterly dividend - its second dividend hike this year. Elsewhere, Universal Health REIT (UHT) rallied more than 2% after hiking its dividend for the third time this year. Net lease REIT Four Corners Property (FCPT) gained 0.6% after raising its dividend by 4.7%. In our State of the REIT Nation report, we discussed how despite the 122 REIT dividend increases this year, historically low payout ratios suggest we're poised to see another big year of dividend growth in 2022.
Timber & Homebuilders: PotlatchDeltic (PCH) rallied nearly 4% this week after it boosted its regular quarterly dividend by 7.3% and also declared a special cash dividend of $4.00/share, as "the alignment of our lumber-leveraged operating strategy with strong housing fundamentals is generating a record amount of cash." A handful of homebuilders and homebuilding suppliers also hiked their dividends this week, also reflecting the ongoing robust strength in the housing market. Homebuilder PulteGroup (PHM) hiked its dividend by 7% - its fourth straight year of dividend increases - while building supplier Owens Corning (OC) hiked its dividend by 35%.
Office: SL Green (SLG) announced a flurry of dividend news this week. First, SLG boosted its regular common dividend to $0.3108/monthly, a 2.5% increase from its prior dividend rate. Second, SLG announced a special stock dividend of $2.4392 per share resulting from "extraordinary gains on asset dispositions in 2021" which will be payable on January 18, 2022. Third, SLG announced a reverse stock split to mitigate the dilutive impact of the SLG common stock issued in the special dividend in a ratio determined after the close on January 10. Elsewhere in the office sector, Franklin Street (FSP) declared a special cash dividend of $0.32/share special dividend, which was also the result of gains on asset sales. Office REITs were among the laggards this week, however, as Omicron
Cannabis: This week, we published Cannabis REITs: When They Go Low, We Get High. Riding a seemingly never-ending 'high' since emerging onto the scene in the mid-2010s, Cannabis REITs are far-and-away the best-performing REIT sector of the past half-decade as the budding industry thrives in the murky and often contradictory regulatory framework of legalized marijuana. Joining Innovative Industrial (IIPR), Power REIT (PW), and AFC Gamma (AFCG), a pair of newcomers will soon enter the pot party - Chicago Atlantic Real Estate (REFI) and Freehold Properties (FHP) - both operating as commercial mortgage REITs - similar to AFCG which went public in early 2021. REFI plans to price its IPO in the coming week in a $106M offering.
Shopping Center: Federal Realty (FRT) announced this week that it will reorganize into an umbrella partnership real estate investment trust, or UPREIT, which is the corporate structure that most REITs operate under. In short, the UPREIT structure allows the REIT to offer stock in exchange for properties (rather than cash), which allows the property owner to sell the property without recognizing a taxable gain - and can sell the REIT stock over time. This week we published Shopping Center REITs: Bargain Hunting that discussed how shopping center REITs are on the cusp of a full recovery across all critical metrics and noted that while Omicron introduces fresh uncertainty, it also presents a potential opportunity. The retail landscape has improved dramatically this year. Retail sales are on-pace to rise over 15% this year while store closings are on-pace for the lowest level in a decade.
Prisons: Farewell - or perhaps good riddance - to the prison REIT sector, the 'darkest corner' of the publicly traded real estate sector. GEO Group (GEO) dipped nearly 10% this week after announcing that it is no longer a REIT, electing instead to qualify as a taxable C-corporation, effective in this current year. GEO had announced back in April that its Board was evaluating its corporate tax structure. Fellow prison operator CoreCivic (CXW) announced a similar move last year and the pair of departures marks the end of a tumultuous eight-year run as members of the REIT sector following their conversions in 2013. GEO's Board also voted unanimously to discontinue GEO’s quarterly dividend. We'll publish an exclusive "final report" on the prison REIT sector this weekend for Income Builder subscribers.
Mortgage REITs were under pressure this week as the yield curve flattened considerably with the 10-2 yield spread compressing to the lowest level since late 2020. Residential mREITs slipped 2.6% with agency mREITs under the most pressure with Orchid Island (ORC) and Ellington Residential (EARN) each lower by more than 7%. Commercial mREITs held firmer this week with notable outperformance from the office-focused lenders including iStar (STAR), BrightSpire (BRSP), and Ladder Capital (LADR). The average residential mortgage REIT now pays a dividend yield of 9.62% while the average commercial mortgage REIT pays a dividend yield of 6.50%.
REIT Preferred stocks declined 0.43% this week, on average, but remain higher by 7.79% on a price-return basis with total returns of roughly 14%. This week, Public Storage (PSA) announced the redemption of its 4.90% Series E Preferred (PSA.PE) on December 30, 2021. Elsewhere, Granite Point Mortgage's (GPMT) 7.00% Series A Fixed-to-Floating Rate Preferred (GPMT.PA) began trading this week on the NYSE. As tracked in the Income Builder Preferred Tracker, there are now 169 active exchange-traded REIT preferred issues and an additional dozen exchange-traded baby bonds.
With four weeks remaining in 2021, Equity REITs are now higher by 26.9% this year on a price return basis while Mortgage REITs have gained 9.3%. This compares with the 21.3% advance on the S&P 500 and the 17.3% gain on the S&P Mid-Cap 400. Led by the residential and retail property sectors, all nineteen REIT sectors are now in positive territory for the year, while on the residential side, seven of eight sectors in the Hoya Capital Housing Index are higher. At 1.34%, the 10-year Treasury yield has climbed 43 basis points since the start of the year and is 82 basis points above its all-time closing low of 0.52% last August, but still 191 basis points below its 2018 peak of 3.25%.
Among the ten major asset classes, REITs are now the best-performing asset class this year on a total returns basis, leapfrogging over the Commodities (DJP) complex this week and outpacing Large, Mid, and Small Cap equities well as international stocks and bonds. 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 12.6%, producing superior total returns to Bonds (AGG), TIPS (TIP), Commodities (DJP), Emerging Markets (EEM), and International (EFA) stocks.
Inflation data highlights the economic calendar in the week ahead, headlined by the Consumer Price Index report on Friday as well as our first look at Consumer Sentiment data for December. Consumer confidence metrics have recorded a historic plunge since late summer as consumer price inflation soars. Consensus estimates call for a 6.7% annual rise in the headline CPI index, which would be the highest since June 1982. On Wednesday, we'll see JOLTS Job Openings data which is expected to show a record-high quantity of job listings in the U.S. as employers continue to scramble to find workers.
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, and Cannabis.
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Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, KRG, IIPR, AFCG, PHM, OC, PCH, PSA, GPMT either through stock ownership, options, or other derivatives. 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.
Additional disclosure: This is an abridged version of the full report published on Hoya Capital Income Builder on December 3rd.
Hoya Capital Real Estate ("Hoya Capital") is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital's Seeking Alpha Profile Page.
Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. 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.
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