Tech Wreck | REITs Stable | Robinhood Shakeout

Summary

• U.S. equity markets plunged Thursday amid a sharp sell-off in the high-flying technology names despite encouraging jobless claims data showing signs of continued healing in the U.S labor markets.
• After hitting fresh record-highs yesterday, the S&P 500 finished lower by 3.4% today while the Dow Jones Industrial Average dipped 808 points following yesterday's 455 point rally.
• Real estate was the relative safe-haven today amid the broader sell-off as Equity REITs finished lower by just 1.3% today with 8 of 18 property sectors finishing in positive territory.
• Today's sell-off had a different - and perhaps oddly encouraging - feel to it compared to the sharp declines seen in March and April. Described as a "Robinhood shakeout," the high-flying speculative names were among the hardest-hit today.
• Today's losses came despite generally positive employment data with Initial and Continuing Jobless claims each declining from last week. Since the peak in early May at around 25 million, Continuing Claims have retreated by 11.6 million.

Real Estate Daily Recap

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U.S. equity markets plunged Thursday amid a sharp sell-off in the high-flying technology names despite encouraging jobless claims data showing signs of continued healing in the U.S labor markets. After hitting fresh record-highs yesterday, the S&P 500 ETF (SPY) finished lower by 3.4% today while the Dow Jones Industrial Average (DJI) dipped 808 points following yesterday's 455 point rally. Real estate was the relative safe-haven today amid the broader sell-off as the Equity REIT ETFs (VNQ) finished lower by just 1.3% today with 8 of 18 property sectors finishing in positive territory. The Mortgage REIT ETF (REM), meanwhile, finished lower by 1.4%.

Today's sell-off had a different - and perhaps oddly encouraging - feel to it compared to the sharp declines seen in March and April in which the economically-sensitive sectors, along with essentially all  Small-Cap (SLY) and Mid-Cap (MDY), stocks were pummeled amid the ongoing economic shutdowns. While all 11 GICS equity sectors were lower on the day, as were homebuilders and the broader Hoya Capital Housing Index, the "shutdown sensitive" sectors were actually among the outperformers today. Described as a "Robinhood shakeout," the high-flying speculative names were among the hardest-hit today. Concerns overextended valuations on several large-cap technology names resulting in the Nasdaq 100 (QQQ) plunging 5.1% today, its worst day since March, but remains higher by more than 30% YTD.

Today's losses came despite generally positive employment data with Initial and Continuing Jobless claims each declining from last week on a seasonally-adjusted basis. Interestingly, the non-seasonally adjusted claims data that were largely ignored when they were showing positive trends have suddenly become the focus after the unadjusted data showed a mild uptick this week in Initial Claims. Initial Jobless Claims declined to 0.90 million in today's report, retreating from 1.01 million last week. Perhaps more encouragingly, Continuing Claims dipped by another 1.24 million last week to 13.25 million. Since the peak in early May at around 25 million, Continuing Claims have retreated by 11.6 million. All eyes are now on the BLS report tomorrow which is expected to show employment gains of roughly 1.4 million in August while the headline unemployment rate is expected to pull back below 10%. 

Commercial Equity REITs

Today, we published Single Family Rentals: The Burbs Are Back. Amid the coronavirus pandemic, residential REITs - particularly the traditionally countercyclical single-family rentals - have proven to be a source of relative shelter for investors as single-family rental REITs are one of six real estate property sectors in positive territory in 2020. Despite the pandemic-related headwinds, SFR REITs reported near-perfect rent collection and strong rental growth. Fueled by the maturing millennial generation, the 2020s were already poised to be a decade of 'suburban revival,' and behavioral changes in the post-coronavirus world have provided an added spark.

Interestingly, the REIT sector actually finished in positive territory today if one were to use an equal-weight index across all 170 REITs in our coverage. Underscoring the quirkiness of today's price action, retail REITs were among the strongest performers with mall REITs Washington Prime (WPG) and Macerich (MAC) finishing higher by 5.4% and 2.1% today, respectively, despite the sharp equity market sell-off. The strongest-performing REIT on the year, cannabis-focused Power REIT (PW) was the worst performer on the day, consistent with the "Robinhood shakeout" theme of a sharp reversal in the high-flying momentum-driven names. Data center REITs including Digital Realty (DLR) and Equinix (EQIX) were also down more than 4% today. 

Earlier this week, we published Office REITs: Work-From-Home Reckoning. Despite reporting near-perfect rent collection throughout the pandemic, office REITs continue to be under pressure as the “Work From Home” paradigm threatens the long-term outlook. Survey data and commentary from corporations indicate that the WFH paradigm is here to stay long after the pandemic subsides. Technology has accelerated the pre-existing trends of increased workplace efficiency. As "WFH" days become the industry standard, the office sector's loss is the housing market's gain. Nuance is required, however, as suburban and Sunbelt office assets are likely to see robust demand over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished lower by 1.2% today and remain lower by 3.3% this week. Commercial mREITs finished lower by 1.0% today and remain lower by 2.6% on the week. Agency-focused residential mREITs were the relative outperformers today, led by Ellington Residential (EARN) and Cherry Hill Mortgage (CHMI). Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished lower by 0.9% today, on average, which was essentially in-line with the performance of their respective common stock issues. Among REITs that offer preferred shares, the performance of these securities has been an average of 18.9% 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 Data

Employment data highlights this week's busy economic calendar, headlined by ADP data yesterday, jobless claims today, and the BLS nonfarm payrolls report on Friday. Economists are looking for employment gains of roughly 1.4 million in August following July's better-than-expected gain of 1.8 million while the headline unemployment rate is expected to pull back below 10%. We also saw Construction Spending data on Tuesday and a flurry of PMI data throughout the week.

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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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