Tech Earnings • Homebuilders Lead • Rent Collection Updates (NYSEARCA:HOMZ)

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Summary

U.S. equity markets remained near record-highs Thursday following better-than-expected employment and housing data while recent coronavirus data indicates that the pandemic has finally shown signs of waning.
Following gains of 1.4% yesterday, the S&P 500 finished fractionally higher today while the Dow Jones Industrial Average declined by 12-points. The tech-heavy Nasdaq 100 gained 0.8%.
After leading the gains yesterday, real estate equities were mostly lower today as the broad-based Equity REIT ETFs finished lower by 0.5% today with 16-of-19 property sectors in negative territory.
Housing Starts climbed to the strongest rate in nearly 15 years in December as the red-hot U.S. housing industry has exhibited few signs of cooling into the winter months.
Net Lease REIT Store Capital (STOR) announced that it collected 91% of rents in January while fellow net lease REIT Broadstone (BNL) announced that it received an investment-grade credit rating of BBB from S&P.

Real Estate Daily Recap

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U.S. equity markets remained near record-highs Thursday following better-than-expected employment and housing data while recent coronavirus data indicates that the pandemic has finally shown signs of waning. Following gains of 1.4% yesterday, the S&P 500 ETF (SPY) finished fractionally higher today while the Dow Jones Industrial Average (DIA) declined by 12-points. The tech-heavy Nasdaq 100 (QQQ) gained 0.8%. After leading the gains yesterday, real estate equities were mostly lower today as the broad-based Equity REIT ETF (VNQ) finished lower by 0.5% today with 16 of 19 property sectors in negative territory while Mortgage REITs (REM) gained 1.3%.

Three of the eleven GICS equity sectors finished higher on the day, led to the upside by the Technology (XLK) sector following strong earnings and a dividend hike from Intel (INTC). Despite the encouraging pandemic data, this week has seen a return of the "stay-at-home" trade with mega-cap technology stocks gaining while the Mid-Cap (MDY) and Small-Cap (SLY) indexes have underperformed. Homebuilders, perhaps the ultimate of "stay at home" winners, delivered another day of strong gains following better-than-expected housing data, lifting the Hoya Capital Housing Index to fresh record-highs.

On that point, Housing Starts climbed to the strongest rate in nearly 15 years in December as the red-hot U.S. housing industry has exhibited few signs of cooling into the winter months. Private housing starts were 5.2% higher than last year while Building Permits jumped 17.3% - each above consensus estimates. The gains during the pandemic have been powered entirely by a surge in single-family construction, which was 12.0% higher than last year. Starts on multifamily units, meanwhile, were lower by 40% from last year as apartment developers remain hesitant to break ground on new projects.

Commercial Real Estate

Net Lease: Store Capital (STOR) finished higher by 0.3% today after it announced that it received payments representing 91% of rent in January, up from 90% in December. STOR commented earlier this month that its 2020 acquisitions exceeded targets, consistent with updates over the last month from other net lease REITs as the vaccine-driven rebound has "reopened the external growth spigot" for the well-capitalized REITs. After the close today, Broadstone Net Lease (BNL), which went public last September, announced that it received an investment-grade credit rating of 'BBB' from S&P.

Today, we published Storage REITs: Riding The Housing Boom. Self-Storage REITs stumbled into 2020 as perennial underperformers with challenged fundamentals amid oversupply headwinds and a strained outlook which appeared certain to deteriorate further amid the pandemic. Reversal of fortunes? Self-storage REITs were unexpected leaders in 2020, producing the second-best returns of any property sector. Storage demand has rebounded sharply since mid-summer, helped by a red-hot housing market. Self-storage demand is driven by "change" so the demographic-driven housing boom bodes well for a continued recovery into the mid-2020s. While supply growth remains a headwind, our long-term outlook remains favorable.

Earlier this week, we published High-Yield REIT CEFs And ETFs: No Free Lunch. High-yield real estate ETFs and CEFs underperformed in 2020 on average, but there were a few strategies that proved resilient. On Wall Street, there's no "free lunch" and understanding the source of excess yield is essential. We stress that diversification is especially critical when "yield-chasing" to minimize elevated idiosyncratic risks, making real estate ETFs an efficient option to complement a disciplined overall strategy. In this report, we take a deep dive into six higher-yielding real estate ETFs and eight real estate CEFs that offer an array of different strategies, risks, and opportunities.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by another 1.7% today and are now higher by 3.1% on the week. Commercial mREITs finished lower by 0.1% but remain higher by 2.0% on the week. Redwood Trust (RWT) surged 6.8% today after it announced that its estimated fair value of its investment portfolio increased 3% during the quarter. It also noted that it locked a record $3.8B of residential loans in Q4, an 81% from Q3. Orchid Island Capital (ORC) slipped 2.7% today after announcing yesterday afternoon that it plans a secondary stock offering, using the proceeds to invest in agency RMBS.

The iShares Mortgage REIT ETF (REM) ended 2020 with total returns of -20.8%, but the market-cap weighted index hides some of the permanent scars of 2020 on a handful of mREITs. Using a simple average, among the 23 residential mREITs, the average price return in 2020 was -33.3%. Among the 18 commercial mREITs, the average price return in 2020 was -18.5%. Of the 41 mREITs in the NAREIT universe, just two paid higher dividends in 2020 compared to 2019, seven paid the same rate, while 32 paid lower dividends.

REIT Preferreds & Bonds

As tracked in our REIT Preferred Stock & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.07% today, on average, but outperformed their respective common stock issues by an average of 0.40%. Public Storage (PSA) completed the previously announced redemption of all of its 5.40% Cumulative Preferreds, Series B (PSA.PB) today. The REIT Preferred ETF (PFFR) ended 2020 with total returns of -0.2% and REIT preferreds are roughly flat through the first four days of 2021. The average REIT preferred trades at a 4% discount to Par Value and has an average current yield of 6.59%.

Economic Data This Week

As discussed in our Real Estate Weekly Outlook, the busy week of economic data concludes on Friday with Existing Home Sales for December.

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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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