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REITs Throw Forever 21 A Lifeline [Daily Recap]

|Includes: Preferred Apartment Communities, Inc. (APTS), ARE, AVB, BPYUP, DIA, IEF, KRC, MDC, PCH, RLGY, SHW, SPG, SPG.PJ, SPY, TMHC, VNQ, WE, XLB, XLE, XLK, XLV
Summary

After dipping more than 2% last week, U.S. equity markets recovered on Monday as investor attention remains focused on the status of the coronavirus outbreak.

The S&P 500 finished higher by 0.7% while the Dow Jones Industrial Average added 140 points. The 10-Year Treasury Yield held steady at 1.52%.

The broad-based commercial Real Estate ETF (VNQ) underperformed a bit today, finishing higher by 0.3%, led by the prison, billboard, and data center REIT sectors as earnings season hits high-gear.

Bankrupt mall-based retailer Forever 21 will be purchased by a consortium that includes mall REITs Simon Property (SPG) and Brookfield Properties (BPR) in a fairly unprecedented move for these landlords.

Construction Spending data missed estimates, but still recorded 5.0% year-over-year growth, which was the strongest rate of growth since September 2018, led by a recovery in residential spending.

Real Estate Daily Recap

Our Real Estate Daily Recap discusses the notable news and events in the real estate sector over the last trading day and highlights sector-by-sector performance. We publish this note every afternoon at HoyaCapital.com and, by reader demand, occasionally on Seeking Alpha to cover significant news. Subscribe to our free mailing list to make sure you never miss the latest developments in the commercial and residential real estate sectors.

After dipping more than 2% last week, U.S. equity markets recovered on Monday as investor attention remains focused on the status of the coronavirus outbreak. The S&P 500 ETF (SPY) finished higher by 0.7% while the Dow Jones Industrial Average (DIA) added 140 points. After sliding by 16 basis points last week, the 10-Year Treasury Yield (IEF) held steady at 1.52%, which is just 20 basis points above the all-time lows of mid-2016. After outperforming last week, the broad-based commercial Real Estate ETF (VNQ) underperformed today, finishing higher by 0.3%, led by the prison, billboard, and data center REIT sectors as earnings season hits high-gear this week.

real estate etf

It was another strong day for the high-flying homebuilders and real estate technology and brokerage sectors, which were higher by another 1% today after solid residential construction spending data this morning, which we'll discuss in more detail below. The Hoya Capital Housing Index finished higher by 0.6%, led by strong gains from Realogy (RLGY), MDC Holdings (MDC), Sherwin-Williams (SHW), and Taylor Morrison (TMHC), which reports results on Wednesday. After a flurry of residential REIT earnings last week, this week we'll get results from AvalonBay (AVB) on Wednesday.homebuilder etfs

Among equity sector-ETFs, the Materials (XLB), Technology (XLK), and Healthcare (XLV) sectors were the leaders on the day while the Energy (XLE) sector was again the laggard. For the year, REITs are now higher by 1.6% compared to the 0.7% gain on the S&P 500. As discussed in our recent 2019 Real Estate Recap, REITs delivered their second-best year of the decade in 2019, delivering a total return of nearly 29%, falling just short the impressive 31% return on the S&P 500.

equity sector ETFs

On the commercial real estate side, news broke this morning that bankrupt mall-based retailer Forever 21 will be purchased by a consortium that includes mall REITs Simon Property (SPG) and Brookfield Properties (BPR) in a fairly unprecedented move for these retail landlords. In other news, WeWork (WE) named former GGP/Brookfield Retail CEO Sandeep Mathrani as its new chief executive. Additionally, Preferred Apartment Communities (APTS) announced a plan to internalize the functions performed by its manager and submanager by acquiring the entities that own the manager and the submanager for $154M.

real estate etf The earnings slate this afternoon includes PotlatchDeltic (PCH), Kilroy (KRC) and Alexandria (ARE). We recently published our 4Q19 Real Estate Earnings Preview: 5 Trends To Watch This Earnings Season. More than 150 REITs and 100 housing industry components will report 4Q19 earnings over the next six weeks. Below we compiled the notable earnings that we're watching across the residential and commercial real estate sectors. We'll have additional coverage as REIT earnings season ramps up next week on iREIT on Alpha.

real estate earnings calendar

Construction Spending Misses Estimates

As analyzed in more detail earlier today on iREIT on Alpha, Total Construction Spending in the United States missed economist estimates in December, posting a month-over-month decline for the first time since June, despite continued strength from the residential housing sector. On a year-over-year basis, however, total spending rose by 5.0% which was the strongest rate of growth since September 2018. Residential spending rose at a 5.5% annualized rate over the same month last year, finishing the year on a high-note after significant weakness earlier in 2019. Nonresidential spending decreased at a 0.1% annualized rate, finishing 2019 with spending levels exactly in-line with 2018 levels.

construction spending 2020 The recent recovery in construction spending comes after a very weak 8-12 months from late 2018 through mid-2019. On a trailing twelve-month basis (and full-year 2019), residential spending remains lower by 4.7% while nonresidential spending is essentially flat. Total construction spending recorded -0.3% total growth for the full year, the first negative rate of full-year growth since 2011. Flying under the radar has been the substantial increase in public construction spending over the last two years, which posted 7.1% full-year growth in 2019.

construction spending

Nonresidential spending remains soft, particularly in the commercial (retail and industrial) and lodging sectors, which is good news for asset owners including REITs which have battled elevated supply growth in recent years. Spending on office assets remains higher by 4.8% year-over-year while healthcare spending remains higher by 1.0%. Notably, spending on water and sewage infrastructure has surged over the last year and spending on highway and street infrastructure is higher by 14.1% year-over-year, explaining a large chunk of the 11.5% annualized rise in public construction spending.

construction spending heat map

Real Estate Sector Reports

Today, we published Real Estate CEFs: Satisfying A High Yield Fix. While CEFs are generally significantly more expensive and less tax-efficient than their ETF counterparts, CEFs can use leverage to amplify returns and have produced comparatively strong performance over the past decade. Real Estate CEFs typically hold a broader range of securities than ETFs including preferreds, convertibles, and bonds. Unlike High Yield REIT ETFs that typically invest in riskier or troubled companies to achieve their sky-high yields, CEFs can achieve comparable yields by levering-up a relatively higher-quality underlying portfolio.

We examine the most popular CEFs with an average dividend yield of 7.0%.  While we believe ETFs are the more suitable option for the vast majority of investors, CEFs can make sense for certain investors seeking high income, access to leverage, active management, and are willing to pay a steep expense premium for it. For investors who absolutely need the 6-7% yield from their real estate allocation, we like the Cohen & Steers suite of levered CEFs: RQI and RNP and believe that these may indeed be slightly better options for sophisticated investors than the high-yield REIT ETFs covered in the last report, especially for tax-advantaged accounts that wouldn't benefit quite as much from the substantially superior tax efficiencies of ETFs.real estate closed end funds

This Week's Economic Calendar

Employment data highlights this week's busy economic calendar, headlined by the BLS nonfarm payrolls report on Friday. Economists are looking for 161k in job growth following last month's slightly disappointing 145k print. Average hourly earnings are expected to increase by 3.0%, down a tenth of a percent from last month, while the unemployment rate is expected to stay steady at 3.5%. We'll also see a flurry of PMI data throughout the week.

real estate economic data

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Disclosure: Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. 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.

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. 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.

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