Daily Recap

• U.S. equity markets dipped Wednesday, dragged down by a continuation of the tech-led sell-off while investor sentiment has soured amid renewed coronavirus concerns and the stalemate on stimulus negotiations.
• Following gains of 1.0% yesterday, the S&P 500 dipped 2.3% today while the tech-heavy Nasdaq 100 declined by 3.1%. The Dow Jones Industrial Average declined by 525 points.
• Real estate equities had a rough day with the broad-based Equity REIT ETF (VNQ) finishing lower by 2.9% today with all 18 property sectors in negative territory.
• Equities entered the session in the green after Johnson & Johnson (JNJ) initiated Phase 3 clinical trials of its single-shot COVID-19 vaccine candidate, and after the House of Representatives passed a short-term spending bill to avert yet another pre-election showdown.
• Mortgage applications to purchase a single-family home rose yet again last week and are now higher by 25% from last year as the housing industry continues to lead the post-pandemic recovery.

Real Estate Daily Recap

U.S. equity markets dipped Wednesday, dragged down by a continuation of the tech-led sell-off while investor sentiment has dimmed amid renewed coronavirus concerns and the stalemate on stimulus negotiations. Following gains of 1.0% yesterday, the S&P 500 ETF (SPY) dipped 2.3% today while the tech-heavy Nasdaq 100 (QQQ) declined by 3.1%. Real estate equities had a rough day with the broad-based Equity REIT ETF (VNQ) finishing lower by 2.9% today with all 18 property sectors in negative territory. The Mortgage REIT ETF (REM) declined by 3.6% after gaining 0.5% yesterday.

Equities entered the session in the green after Johnson & Johnson (JNJ) initiated Phase 3 clinical trials of its single-shot COVID-19 vaccine candidate, and after the House of Representatives passed a short-term spending bill to avert yet another pre-election showdown. Sentiment soured throughout the day, however, and all 11 GICS equity sectors finished in negative territory today, dragged on the downside by the Energy (XLE), Technology (XLK), and Materials (XLB) sectors. As noted yesterday, however, choppiness in the equity markets over the past month hasn't yet translated to the bond markets, which have been notably anchored.

Underscoring the rather indiscriminate selling pressure today, homebuilders and the broader Hoya Capital Housing Index were among the laggards despite strong mortgage data this morning which showed that the red-hot housing market is showing no signs of cooling. The Mortgage Bankers Association reported that mortgage applications to purchase a single-family home are now higher by 25% from last year. The 30-Year Fixed Mortgage Rate with conforming loan balances stands at 3.10%, just above record-low-levels, and down 55 basis points from last year. Homebuilder KB Home (KBH) was among the laggards despite reporting better-than-expected earnings in Q3 and noted that the momentum continued into Q4 with net orders jumping 32% for the first three weeks of September.

Commercial Equity REITs

All 170 REITs finished in negative territory today, led to the downside by the "shutdown-sensitive" sectors including student housing, retail, and lodging REITs. While the United States continues to post encouraging declines in the coronavirus outbreak, many European countries appear to be in the midst of a second wave of the pandemic, and U.S. investors fear that we'll see pressure to reimpose shutdown measures stateside. Small-cap hotel REITs Ashford Hotels (AHT), Southerly Hotels (SOHO), and Braemar Hotels (BHR) were among the hardest-hit REITs on the day.

It was a fairly slow news day in the REIT sector after a busy two weeks of dividend declarations and rent collection updates. After the bell yesterday, Healthcare Trust of America (HTA) declared a $0.32/share quarterly dividend, 1.6% increase from prior dividend of $0.315.We've now tracked 29 equity REITs that have raised dividends in 2020 to levels above their pre-pandemic rates - primarily in the "essential" property sectors - technology, housing, and industrials, but net lease REITs have come on strong with five dividend hikes since the start of June. On the other side, 64 equity REITs have reduced or suspended their dividend in 2020.

Yesterday, we published Industrial REITs: Virus Exposes Frail Supply Chains. The "hub of e-commerce" and the hottest property sector of the last half-decade, Industrial REITs have been unfazed by the coronavirus-induced pain that has encumbered much of the REIT sector. The dramatic acceleration in e-commerce adoption has pulled forward the "retail apocalypse" trends as retailers divert more of their capital away from malls and into distribution supply chains. While much of the REIT sector was slashing dividends this year, nearly half of industrial REITs have raised dividends in 2020. Rent collection among industrial REITs has averaged more than 97% since April. With the pandemic exposing deficiencies in supply chains, we believe the logistics-boom is back in the early-innings.

Mortgage REITs

As tracked in our Mortgage REIT Tracker available to iREIT on Alpha subscribers, residential mREITs lower by 3.8% today and pushed their weekly declines to 7.1%. Commercial mREITs declined by 3.7% and are now lower by 6.4% on the week. After the bell yesterday, Western Mortgage Capital (WMC) announced that it is resuming its dividend with a quarterly payout of $0.05 per share, but still well below its pre-pandemic rate of $0.31 per share. The Company also provided an estimated GAAP book value per share of as of August 31, 2020 of $3.31, implying a roughly 40% discount to BV. 

Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. Last week, Hunt Companies (HCFT) became the second mortgage REIT to raise its dividend above pre-pandemic levels by declaring a $0.085 dividend, a 13% increase from its prior dividend of $0.075. HCFT joined Arbor Realty (ABR) as the only mREITs that have increased their dividend in 2020 to levels above 2019 payouts. Last 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 1.42% today, on average, but outperformed their respective common stock issues by an average of 2.74%. Among REITs that offer preferred shares, the performance of these securities has been an average of 22.87% 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

Publish datether busy slate of economic and housing data this week. Yesterday, we saw Existing Home Sales for August, which topped estimates with an annualized rate of 6.0 million. Then on Thursday, we'll see New Home Sales for August. Last month, New Home Sales jumped 13.9% and the 901k seasonally-adjusted rate was the strongest sales rate since 2007 Today, we saw the FHFA House Price Index, which showed reacceleration in home price appreciation. As usual, we'll also be watching the weekly MBA Mortgage data on Wednesday and Jobless Claims data on Thursday.

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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.