Risk-On | Deflation | Timber!
REITs, ETF investing, Dividend Investing, Homebuilders
Seeking Alpha Analyst Since 2012
Real Estate • High Yield • Dividend Growth
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Summary
- U.S. equity markets finished higher on Friday, pushing the major averages to a second-straight week of solid gains despite continued concerns over increasing levels of confirmed coronavirus cases.
- Finishing the week higher by 1.7%, the S&P 500 finished higher by 1.0% today while the Dow Jones Industrial Average gained 369 points, reversing yesterday's 361 points decline.
- Ending the week lower by roughly 2% - the second-worst performing equity sector this week - Equity REIT ETFs finished higher by 0.4% today with 14 of 18 sectors higher.
- Producer Prices unexpectedly fell in June as inflation metrics remain near record-lows despite unprecedented levels of fiscal and monetary stimulus. We'll have a full breakdown in our Weekly Outlook published Saturday morning.
- Timber! One commodity that is seeing some upward price pressure is lumber prices, which have surged in recent months amid the sharp rebound in home construction activity. Timber REITs led the gains today following positive analyst commentary.
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 occasionally for free on our Blog to cover significant news and events. Subscribe to our free mailing list to make sure you never miss the latest developments in the commercial and residential real estate sectors. You can also follow our real-time commentary on Twitter and LinkedIn.
U.S. equity markets finished higher on Friday, pushing the major averages to a second-straight week of solid gains ahead of the start of second-quarter earnings season amid continued concerns over increasing levels of confirmed coronavirus cases. Finishing the week higher by 1.7%, the S&P 500 ETF (SPY) finished higher by 1.0% today while the Dow Jones Industrial Average (DIA) gained 369 points, reversing yesterday's 361 points decline. Ending the week lower by roughly 2% - the second-worst performing equity sector this week - the broad-based Equity REIT ETFs finished higher by 0.4% today with 14 of 18 property sectors in positive territory while the Mortgage REIT ETF (REM) gained 2.3%, finishing the week off by 1.0%.
The gains today - and on the week - came amid a backdrop of continued uncertainty over the sustainability of the recent economic rebound given the acceleration in coronavirus cases in several regions in the country. Positive vaccine news quelled some of these concerns today on reports of a study of Gilead's (GLD) that shows it reduced the risk of death for severely sick coronavirus patients by 62% compared with standard care alone. Ten of the eleven GICS equity sectors finished higher today, led by the economically-sensitive Financials (XLF) and Energy (XLE) sectors while Homebuilders and the broader Hoya Capital Housing Index ended the day with strong gains as well ahead of a busy slate of U.S. housing data next week.
While it was a fairly quiet week of economic data, we did see Producer Price Inflation data this morning, which unexpectedly fell in June as inflation metrics remain near record-lows despite unprecedented levels of fiscal and monetary stimulus. The Bureau of Labor Statistics reported that the producer price index for final demand dropped 0.2% last month after rising 0.4% in May. In the 12 months through June, the PPI declined 0.8% after decreasing 0.8% in May. Core PPI is now higher by just 0.08% on a year-over-year basis, declining to the lowest level since the depths of the Financial Crisis in 2009.
Commercial Equity REITs
Interestingly, one commodity that is seeing some upward price pressure is lumber prices, which have surged in recent months amid the sharp rebound in home construction activity that we've detailed extensively in our various reports including Homebuilders: Clear Signs of V-Shaped Recovery. Lumber futures (LB1:COM) jumped nearly 60% in the second quarter following a decline of roughly 30% in the first quarter. Timber REITs were the leaders in the equity REIT sector today, led by CatchMark (CTT), Weyerhaeuser (WY), and Rayonier (RYN) following positive commentary on recent housing industry trends from Wall Street Journal, Barrons, and others.
Hotel REITs were also among the leaders today even as micro-cap hotel REIT InnSuites Hospitality (IHT) received notice from NYSE regarding non filing of its annual report for the year ended Jan. 31, 2020. The notice from NYSE has no immediate effect on the listing or trading of the Trust’s shares and the company is working to file the delinquent report soon. Yesterday, we published Hotel REITs: Dividend Cut Bloodbath. Hotel REITs have been hit harder than any real estate sector during the ongoing coronavirus pandemic and resulting economic lockdowns, plunging more than 50% in 2020. "No vacancy" becomes "no occupancy." Following a record year of occupancy and revenues for the hotel industry in 2019, hotels are expecting a mind-blowing 50% plunge in revenues this year. Every hotel REIT slashed its dividend over the last quarter, but even that might not be enough to stay afloat as the industry faces an existential crisis.
We also heard several interim business updates from some REITs over the last 24 hours ahead of earnings season, which kicks off in two weeks. Net Lease REIT Spirit Realty (SRC) provided a rent update commenting that they had received 75.95% of its June 2020 rent across the entire portfolio and 74.4% for the quarter. Industrial REIT Terreno Realty (TRNO) provided an operational update, noting that it had 96% quarter-end occupancy compared to prior quarter of 97.8% while recording a strong 38.2% increase in cash rents on new and renewed leases. This follows a slate of generally strong rent collection updates from REITs over the past several weeks as rent collection has generally improved sequentially from April to May and to June as rent collection remains a non-issue for "essential" property sectors.
Mortgage REITs
As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished higher by 2.5% today but remain lower by 39.7% for the year while commercial mREITs gained 2.9% today but remian lower by 38.4% for the year. Residential mREITs were the hardest-hit real estate sector during the depths of the pandemic, but have seen conditions stabilize considerably over the last quarter amid continued 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 during the pandemic.
REIT Preferreds & Bonds
As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.1% today, on average, but underperformed their respective common stock issues by an average of 2.1%. Among REITs that offer preferred shares, the performance of these securities has been an average of 17.3% higher in 2020 than their respective 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's Economic Calendar
We'll have a full analysis of this week's economic data in our Real Estate Weekly Outlook published on Saturday morning.
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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.
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