Stocks Stall | Earnings Begin | Housing Booms

Daily Recap

• U.S. equity markets finished sharply lower Monday ahead of a jam-packed week of economic data and corporate earnings reports as optimism faded for an agreement on the ever-elusive fiscal stimulus package.
• Following three straight weeks of gains, the S&P 500 finished lower by 1.6% while the tech-heavy Nasdaq 100 also declined 1.6% and the Dow Jones Industrial Average dipped 411-points.
• Following a decline of 2.7% last week, the broad-based Equity REIT ETF (VNQ) finished lower by 1.6% today with 17 of 18 property sectors in negative territory.
• Real estate earnings season kicks-off this afternoon with reports from net lease REIT Agree Realty (ADC) and manufactured housing REIT Equity Lifestyle (ELS), which are two of the 31 REITs that have raised dividend in 2020.
• One of the few areas of consistent strength throughout the pandemic has been the U.S. housing market. Homebuilder Sentiment jumped to record-highs in October as the housing industry shows few signs of cooling. We also saw some major M&A news in the single-family rental sector today.

Real Estate Daily Recap

U.S. equity markets finished sharply lower Monday ahead of a jam-packed week of economic data and corporate earnings reports as optimism faded for an agreement on the ever-elusive fiscal stimulus package. Coming off gains of 0.1% last week, the S&P 500 ETF (SPY) finished lower by 1.6% today while the tech-heavy Nasdaq 100 (QQQ) also declined 1.6% and the Dow Jones Industrial Average (DIA) dipped 411 points. Following a decline of 2.7% last week, the broad-based Equity REIT ETF (VNQ) finished lower by 1.6% today with 17 of 18 property sectors in negative territory while the Mortgage REIT ETF (REM) dipped 1.7% on the day.

Equity markets began the session firmly in the green but stumbled throughout the day with all 11 GICS equity sectors finishing in the red. Technology stocks were again under pressure today amid an ongoing controversy over the censorship of a series of New York Post reports critical of former Vice President Joe Biden. On a related note, investors may be pricing in a higher likelihood of a contested election on signs that polls are tightening in a similar pattern as in 2016. Homebuilders and the broader Hoya Capital Housing Index were also lower today despite record-high Homebuilder Sentiment data this morning and ahead of a jam-packed week of housing data and earnings results.

One of the few areas of consistent strength throughout the pandemic has been the U.S. housing market, perhaps the most critical sector of the U.S. economy. Following a record plunge in April back to the lowest levels since 2011, Homebuilder Sentiment has now fully recovered all of the lost ground, climbing to new record-highs in October. All three subcomponents climbed to record-highs with Current Sales jumping to 90, Future Sales rising to 88, and Home Buyer Traffic climbing to 74. The Northeast and West regions led the rebound with each regional index climbing to record highs in October. We'll hear earnings results from a handful of high-flying homebuilders including NVR, Inc. (NVR), PulteGroup (PHM), Meritage Homes (MTH), and TRI Pointe (TPH) which we previewed in Homebuilders: A V-Shaped Vendetta.

The economic data is just getting started, as we have a jam-packed slate of housing data in the week ahead. On Tuesday, we'll see Housing Starts and Building Permits for September. Last month, single-family starts climbed to 1.021 million, which was the third-strongest rate of single-family housing starts of the past 14 years while the 1.036 million rate in single-family permits was the strongest since 2007. On Thursday, we'll see Existing Home Sales for September. Last month, Existing Home Sales rose by 10.5% from the prior year to the strongest sales pace in 14 years.

Commercial Equity REITs

Today, we published REIT Earnings Preview: Who Paid The Rent? Real estate earnings season kicks this afternoon with more than 200 REITs and housing industry companies reporting earnings over the next month. Rent collection - a metric that was rarely reported in the pre-COVID-19 era - has become the most critical statistic tracked by investors due to its impact on dividend-paying capacity. REITs enter third-quarter earnings season as the third-worst performing out of 11 GICS equity sectors, but improving rent collection and dividend commentary could be a positive catalyst to drive a recovery. In the report, we discussed the trends that we're watching this earnings season in each of the real estate property sectors. 

Preempting the start of earnings season, we saw some significant M&A news this morning. Front Yard Residential (RESI) soared more than 30% today as the small-cap single family rental REIT will be acquired by a group led by Pretium and Ares Management (ARES), an alternative asset manager.  Petrium, which owns Progress Residential, is currently the third-largest owner and operator of single-family rental homes in the United States. Under terms of the deal, Front Yard shareholders will receive $13.50 a share in cash for each Front Yard share they own, representing a 35.5% premium to Friday's closing price of $9.96. The all-cash deal values Front Yard at $2.4B and is expected to close in Q1 of 2021. We discussed the "institutionalization" of the single family rental market in Single-Family Rentals: The Burbs Are Back.

After the close today, net lease REIT Agree Realty (ADC) and manufactured housing REIT Equity Lifestyle (ELS) released earnings results with their conference calls scheduled for tomorrow morning. These two REITs have been among the 31 equity REITs to raise their dividend this year while 65 equity REITs have cut or suspended their payouts. Tomorrow, we'll hear results from industrial REITs Prologis (PLD) and Rexford (REXR). We'll discuss these reports in tomorrow's Real Estate Daily Recap.

Mortgage REITs

As tracked in our Mortgage REIT Tracker, residential mREITs finished lower by 1.7% today after ending last week lower by 1.2%. Commercial mREITs declined by 2.5% today after ending last week lower by 1.2% as well. Mortgage REIT earnings season is slated to begin in two weeks with investors anxious to hear updated dividend plans and book value estimates. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised. 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, REIT Preferred stocks finished lower by 0.26% today, on average, but outperformed their respective common stock issues by an average of 1.24%. The preferred issues of troubled mall REITs CBL & Associates (CBL) and Washington Prime (WPG) were among the laggards today. Among REITs that offer preferred shares, the performance of these securities has been an average of 21.89% 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.

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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.