Stimulus Stalemate | REIT M&A | Mortgage Rates At Record-Lows

Summary

• U.S. equity markets finished lower Thursday after Congress failed to reach a compromise on a potential coronavirus relief bill and as the "center of the pandemic" returns to Western Europe.
• Following gains of 2.0% yesterday, S&P 500 finished lower by 1.7% today while the Dow Jones Industrial Average dipped 406 points and the Nasdaq 100 declined 2.0%.
• After finishing higher by 1.0% yesterday, Equity REITs retreated by 1.3% today with 17 of 18 property sectors finishing in negative territory. Mortgage REITs declined by 1.0%.
• Today's declines came after a lukewarm Initial and Jobless Claims report following several weeks of encouraging data. Initial Jobless Claims held exactly steady last week at 884k, but Continuing Claims increased sightly to 13.39 million from 13.29 million.
• Simon Property (SPG) and Brookfield Property (BPY) have partnered on a $800m deal to save JC Penney from bankruptcy. Meanwhile, Brookfield Asset Management (BAM) is seeking a potential sale of its Simply Self Storage unit. Public Storage (PSA), ExtraSpace (EXR), and CubeSmart (CUBE) could be potential bidders.

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 on iREIT on Alpha and occasionally here on Seeking Alpha to cover significant news and events. Subscribe to our free email 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 for the fourth day in the past five Thursday after Congress failed to reach a compromise on a potential coronavirus relief bill and as the unfortunate claim of "center of the pandemic" returns to Europe amid a reacceleration in case counts in several countries. Following gains of 2.0% yesterday, S&P 500 ETF (SPY) finished lower by 1.7% today while the Dow Jones Industrial Average (DJI) dipped 406 points and the Nasdaq 100 (QQQ) declined 2.0%. After finishing higher by 1.0% yesterday, Equity REIT ETFs (VNQ) retreated by 1.3% today with 17 of 18 property sectors finishing in negative territory. The Mortgage REIT ETF (REM), meanwhile, lower by 1.0% after gaining 1.3% yesterday.

The "tech wreck" trading action that began last Thursday and dragged the major indexes into "correction territory" earlier this week may not be done quite yet. Reversing yesterday's sector performance, all 11 GICS equity sectors finished in negative territory today, dragged down by the Energy (XLE), Technology (XLK), and Utilities (XLU) sectors. Restoration Hardware (RH) led the Hoya Capital Housing Index to outperformance today after the home furnishings company reported a stronger than expected outlook, citing favorable trends relating to the strength of the U.S. housing market. On that point, the 30-year fixed-rate mortgage declined to record-lows at 2.86% last week in the Freddie Mac Mortgage Market Survey, which helped to power a 40% increase in home purchase mortgage applications from last year. 

Today's declines came after a lukewarm Initial and Jobless Claims report following several weeks of encouraging data. Initial Jobless Claims held exactly steady last week at 884k, but Continuing Claims increased sightly to 13.39 million from 13.29 million in the prior week. Since the peak in early May at around 25 million, however, Continuing Claims have retreated by 11.5 million. The Bureau of Labor Statistics reported that the U.S. economy added 1.37 million jobs in August - slightly better than economists' estimates for gains of 1.35 million. Most notably, however, the "headline" unemployment rate ticked down to 8.4% from 10.2% in the prior month as the separate BLS Household Survey - on which the unemployment rate is derived from - showed employment gains of 3.76 million jobs in August - the second largest month of job growth in the survey's history.

Commercial Equity REITs

Today we published High-Yield ETFs And CEFs: No Free Lunch.  "Give me yield or give me death." In a world of perpetually low interest rates, investors have piled into yield-oriented equity sectors to quench their voracious appetite for income. High-yield real estate ETFs and CEFs have been popular options, which typically offer juicy dividend yields of 5-10% compared to their broad-based real estate ETF counterparts yielding below 4%. On Wall Street, however, there’s no free lunch and many of these high-yield funds REITs been slammed by the coronavirus pandemic, bearing the brunt of the wave of dividend cuts that has bedeviled the sector. While roughly a third of the equity REIT sector cut or reduced dividends in 2020, many of these high-yield ETFs and CEF saw 60-85% of their constituents cut dividends this year. Below, we outline the primary differences between these three fund structures.

Earlier this week, we published Net Lease REITs: Reopening Revival. Net Lease REITs were punished by the coronavirus-related economic shutdowns, but have rebounded over the last several months as critical shutdown-sensitive tenants reopen their doors and as rent collection improves. As a whole, rent collection has improved sequentially from a low of 65% in the initial April reporting towards 90% in July as regions continue to lift shutdown orders. We got some fresh data over the last 24 hours from Alpine Income Property Trust (PINE), which announced yesterday afternoon that it collected 100% of the contractual base rents for September 2020. While several "experience-heavy" REITs continue to have their backs against the walls, the sector as a whole remains on a relatively firm footing as four net lease REITs have actually increased their dividend in 2020.

We also heard confirmation yesterday evening of earlier reports that Simon Property (SPG) and Brookfield Property (BPY) have partnered on a $800m deal to save JC Penney from bankruptcy, a move that would save 70,000 jobs and 650 stores, according to comments during a court hearing by law firm Kirkland & Ellis. This deal represents a continuation of Simon Property's shopping spree as the largest mall owner in the U.S. has made investments into a number of distressed retail brands over the last year including Brooks Brothers, Lucky Brand, Forever 21. A strategy that does have successful precedent - notably the acquisition of Aeropostale in 2016 - the investments will keep many storefronts open, at least for now. We analyzed the recent wave of M&A activity in Mall REITs: Shop Till You Drop. There was some additional M&A news today with reports that Brookfield Asset Management (BAM) is seeking a potential sale of its Simply Self Storage unit. We believe that Public Storage (PSA), CubeSmart (CUBE), or ExtraSpace (EXR) could be potential buyers of the roughly $1.3 billion portfolio. Malls, prison, and student housing REITs were the laggards on the day while the gaming and occasion REITs were the lone property sector to eek out a gain on the day, led by Gaming & Leisure Properties (GLPI). 

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs finished lower by 1.4% today and are now lower by 0.8% this week. Commercial mREITs finished lower by 1.2% today and remain lower by 1.6% this week. 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 higher by 0.5% today, on average, and outperformed their respective common stock issues by an average of 1.8%. Ashford Hospitality Trust (AHT) common shares dipped 10.0% today after starting an offer to exchange its preferred stock for 126M shares of newly issued common stock and $30M in cash. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.5% 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

The economic calendar slows down in the holiday-shortened week after a frenetic slate of employment and housing data over the last two weeks. The economic slate wraps up tomorrow with Consumer Price Index inflation data for August. We'll have a full analysis of this week's economic data in our Real Estate Weekly Outlook report. 

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