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 lower Tuesday amidst a busy slate of corporate earnings results and vaccine news while investors look for clarity on the details of the forthcoming fiscal stimulus package. Following a gain of 0.7% yesterday, the S&P 500 ETF (SPY) finished lower by 0.6% today while the Dow Jones Industrial Average (DJI) dipped 205 points after yesterday's 115-point rally. After gaining 1.0% yesterday, the broad-based Equity REIT ETF (VNQ) finished higher by another 2.0% today with 17 of 18 property sectors in positive territory ahead of a busy slate of earnings this afternoon with nearly a dozen REITs reporting Q2 results. The Mortgage REIT ETF (REM), meanwhile, gained 1.0% following gains of 0.7% yesterday.
3 of the 11 GICS equity sectors finished higher today, led by Commerical Real Estate (XLRE), Utilities (XLU), and Consumer Staples (XLP). The 10-Year Treasury Yield (IEF) retreated by 3 basis point today to close at 0.58%, barely its all-time record-low closing yield of 0.54% set on March 9. Also of note, the Gold ETF (GLD) gained another 0.8% today and is now higher by roughly 27% in 2020 compared to the 0.3% YTD decline on the S&P 500. Homebuilders and the broader Hoya Capital Housing Index consolidated after a strong rally over the last month following results from DR Horton (DHI), which reported that net sales orders surged 38% from last year following similarly-strong results from NVR (NVR), PulteGroup (PHM), and Meritage Homes Corp (MTH) last week.
Residential Real Estate
The US Census Bureau released its quarterly Housing Vacancies and Homeownership data today. Headlining that report was data that showed that the homeownership rate jumped to the highest level since 2008 at 67.9%, driven by a continued rise in the household formation rate. Consistent with the demographic trends we've discussed, we forecast a steady uptick in the homeownership rate over the next decade as millennials - the largest generation in American history - begin to enter "ownership age." Recent gains in the homeownership rate over the last three years have been due primarily to a recovery in the younger age cohorts tracked by the Census Bureau. The 35- to 45-year-old cohort saw homeownership rates climb more than one percentage point to 64.3%, the highest in more than ten years.
Gains in the homeownership rate, however, did not come at the expense of the rental markets. Housing markets remain historically tight as the vacancy rate for both rental and owner-occupied units remains at or near 40-year lows. The homeowner vacancy rate ticked lower to 0.9% which was the lowest level on record. The rental vacancy fell sharply lower to 5.7% which was the lowest vacancy rate since 1981. If trends from the Financial Crisis hold, a coronavirus recession would support rental household formations, though the coronavirus pandemic may see different trends if a meaningful percentage of urban residents - especially around NYC - do indeed decide move to the suburbs. In the aftermath of the Financial Crisis, rental household formations climbed to multi-decade highs while owner household formations were negative in every year between 2007 and 2013.
Gains in the homeownership rate - and declines in the vacancy rates of both rented and owned households - came as a result of gains in total household formations. Total household formations have increased by 1.9% over the last twelve months, which is the strongest twelve months of growth in household formations since 1985. There are roughly 20 million more U.S. households now than there were at the start of 2000. Given the abnormally large five-year cohort of 25-29 year-olds, we believe that the household formation rate will see continued gradual increases over the next five years as this "mini-generation" enters prime first-time homebuying age, but will likely see a slowdown over the next several quarters related to the coronavirus-induced recession before rebounding strongly in 2021 and 2022, which we expect to provide a very positive fundamental backdrop for housing-related industries.
Commercial Equity REITs
REIT earnings season has officially begun and will hit high-gear this week with six dozen equity REITs and a dozen mortgage REITs reporting results. Last week, we published Dividend Cuts And Overdue Rent: Previewing Earnings Season. REIT earnings should provide pivotal information on rent collection and future dividend plans. We compiled the notable earnings that we’re watching across the residential and commercial real estate sectors. We will provide real-time commentary throughout earnings season and track rent collection and dividend cuts and resumptions in our all-new iREIT Earnings Headquarters tool on iREIT on Alpha.
Industrial REIT STAG Industrial (STAG) is trading slightly higher in the after-hours session after reporting that it collected 98% of Q2 rents and same-store NOI growth of 2.1%. EastGroup Properties (EGP) announced that it collected roughly 98% of Q2 rents and recorded same-store NOI growth of 4.1% while raising full-year guidance. EGP now sees FFO growing 6.0% in 2020 versus the prior expectation of 3.8%. Last week, Prologis (PLD) and First Industrial (FR) were the first two REITs to raise guidance this quarter. As discussed in our recent Industrial REIT sector report, industrial REITs haven't skipped a beat since the outset of the pandemic, collecting essentially all the rent as the supply/demand outlook remains highly favorable.
Equity Residential (EQR) reported that it collected on average 97% of its total monthly rents in 2Q20 and that it "experienced a recovery in demand by late May 2020" with initial leads, traffic and applications in-line with the same time last year. UDR Inc (UDR) reported that it collected 97.5% of billed rents in 2Q20 compared to the 99.6% rate in 2Q19. Leasing traffic was roughly on-par with last year and UDR's blended rental rate rose 0.8% from last year. Rent collection among residential REITs continues to hover around 95-98%. While we believe that the proposed reduction in federal unemployment supplementals will negatively impact rent collection in some segments of the Class B and C rental markets, REITs primarily hold assets in the upper-tier of the quality spectrum which should be relatively unaffected by these changes.
Shopping center REITs were among the strongest performers today despite SITE Centers (SITC) reporting a 19.1% plunge in same-store NOI and announced that its dividend suspension will continue into Q3. SITC did have some good news to report, however, as it noted that 100% of their properties are currently operational and over 90% of their tenants are currently open for business while also reporting strong new leasing spreads of 23.1% and renewal leasing spreads of 6.6%. Fellow shopping center REITs Cedar Realty (CDR), Retail Properties of America (RPAI), and Retail Opportunity (ROIC) all gained over 6% today as well.
Data center REIT QTS Realty (QTS) finished lower by 0.1% today after it announced results yesterday afternoon. QTS reported $21 million in new and modified renewal leases during the second quarter of 2020. This compares to $22 million last quarter and 20 million in 2Q19. As we discussed in Data Center REITs: The New Digital Office, leasing activity - the most closely-watched earnings metric - surged in the first quarter to the highest level since mid-2018 as the sector continues to ride substantial secular tailwinds.
Mortgage REITs
As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished higher by 0.7% today to push their weekly gains to 1.1% while commercial mREITs gained 2.3% to push their weekly gains up to 3.0%. Today, we published our mREIT Earnings Preview - Mortgage REITs: Back From the Brink. The second-largest residential mREIT, AGNC Mortgage (AGNC) finished slightly lower today after reporting results after the bell yesterday afternoon, noting that tangible book value rose by 9.5% to $14.92 per share from the end of Q1 to the end of Q2.
Despite a 70% rally from the lows in early-April, mREITs remain lower by more than 40% this year and trade at an estimated 20% discount to book value. Few asset classes have been slammed harder by the pandemic than Mortgage REITs, which have seen a "dividend cut bloodbath" with 33 of 42 mREITs suspending or reducing their dividends. We discussed the three trends that we're watching this earnings season: 1) Dividend Cuts and Resumptions; 2) Updated Book Value Estimates, and 3) Macroeconomic Commentary on the Mortgage and Housing Markets. 
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 0.4% today, on average, but underperformed their respective common stock issues by an average of 1.9%. Among REITs that offer preferred shares, the performance of these securities has been an average of 17.7% 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
As discussed in our Real Estate Weekly Outlook, in addition to a frenetic slate of real estate earnings, we have another busy week of economic data in the week ahead highlighted by GDP data on Thursday which is expected to show a record 34% annualized decline in economic output resulting from the devastating lockdowns in effect from April through June in many parts of the country. We'll also see a few more housing data points including Pending Home Sales on Wednesday. Initial and Continuing Jobless Claims data, released on Thursday, will also continue to be our focus for indications that more temporarily-unemployed Americans are returning to work.
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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.
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. 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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