Dividend Hikes Lift REITs | Seeking Alpha


Real Estate Weekly Outlook

Is 2020 just getting started? On another choppy week, U.S. equity markets finished mostly lower despite a solid slate of economic and housing data and assurances from the Federal Reserve that it would keep interest rates near-zero indefinitely. In the midst of a historically contentious U.S. election season, consumer sentiment rebounded more than expected in early September to the highest level since March, but a reacceleration in the coronavirus pandemic in Europe has renewed concerns over a potential “second wave” of the outbreak in the United States.

(Hoya Capital Real Estate, Co-Produced with Brad Thomas)

Declining for the third straight week following a six-week winning streak, the S&P 500 ETF (SPY) dipped another 1.0% this week and is now roughly 7% below its recent all-time highs set last month. The “tech-wreck” dragged on for the Nasdaq 100 ETF (QQQ), which dipped another 1.3% to stay in “correction territory” despite a flurry of high-profile IPOs this week. An encouraging slate of dividend news and rent collection updates buoyed real estate equities this week, particularly the more beaten-down property sectors, including retail, hotels, and student housing. The Equity REIT ETF (VNQ) finished flat, but the Mortgage REIT ETF (REM) jumped by 3.7%.

real estate investing

4 of the 11 GICS equity sectors finished in positive territory this week, led by the Energy (XLE) sector, which was given a boost by a jump in crude oil (USO) prices after Hurricane Sally hit Alabama this week as a Category 2 storm. Following a similar pattern as the past two weeks, the economically-sensitive and domestic-focused sectors generally outperformed this week and the Mid-Cap (MDY) and Small-Cap (SLY) indexes both finished with solid gains. Homebuilders and the broader Hoya Capital Housing Index were among the leaders on the week after another strong slate of housing data including record-high Homebuilder Sentiment and data showing that recently relentless housing demand has continued into the Autumn.

homebuilding ETF

Real Estate Economic Data

Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.

real estate data

Helping to power the equity market rally over the last five months has been data showing a dramatic rebound in housing market activity, 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 September. All three subcomponents gained last month, Current Sales jumping to 88, Future Sales rising to 84, and Home Buyer Traffic rebounded to 73, far exceeding the highest level of record. The Mortgage Bankers Association reported this week that mortgage applications to purchase a single-family home are now higher by 6% from the same week last year, the 17th straight week of positive year-over-year growth following a plunge in mortgage demand in March and April.

homebuilder sentiment 2020

Consistent with impressive earnings reports from homebuilders over the last week and improving homebuilder sentiment, the Census Bureau reported this week that single-family Housing Starts were 12.1% higher than last August while total Housing Starts were 2.8% higher than last year. Of note, the 1.021m rate in August was the third-strongest rate of single-family housing starts of the past fourteen years while the 1.036 million rate in single-family permits was the strongest since 2007. This new supply is desperately needed as RE/MAX (RMAX) noted this week that August recorded the lowest housing inventory ever (-29.6% Y/Y) and the shortest days on the market as well as the highest median sales price, which surged 11.5% from last year.

housing starts 2020

As it relates to an emerging V-shaped recovery, perhaps a “close second” to the housing industry in the velocity and magnitude of its rebound has been the retail industry, which has regained all of the lost ground during the pandemic. Aided by the WWII levels of fiscal stimulus over the last several months, retail sales jumped to all-time record highs on an annualized basis in August, climbing 0.6% from last month and 2.6% from the same month last year. Naturally, e-commerce sales have led the charge this year with online sales now higher by nearly 25% from last year while brick-and-mortar sales are now flat on from last year. While there may be enough “saved-up-stimulus” to keep sales rolling in September, the path forward for retail sales in months ahead becomes less certain if a fiscal stimulus agreement can’t be reached.

retail sales august 2020

Food services and drinking places (bars and restaurants) rebounded in August as more states and cities lifted lockdown measures, but this category remains lower by 15% from last August. Naturally, housing-related retail categories have seen a similar resurgence in recent months as the homebuilders themselves as the Building Materials category is second only to e-commerce as the top-performing retail category with a 15.4% higher sales rate than last year. As we’ve discussed for several months, the building materials category – which includes Home Depot (HD) and Lowe’s (LOW) – has been a notable positive standout during the pandemic, reflecting the continued resilience of the housing sector and the fact that households have exhibited a propensity to prioritize investments in home improvement amid the “work-from-home” era.

retail sales august 2020

Commercial Equity REITs

We’re in the heart of dividend declaration season in the REIT sector, a normally sleepy month-long period between earnings seasons that has taken on added significance amid the pandemic. After the REIT sector was slammed by a wave of 64 dividend cuts in March through June, since July, we’ve seen far more dividend increases than dividend cuts in the REIT sector, including five more boosts from equity REITs and three from mortgage REITs this week. Interestingly, since the end of June, just three REITs have reduced or suspended dividends: prison REIT GEO Group (GEO), and office REITs Empire State Realty Trust (ESRT), and Vornado Realty (NYSE:VNO.PK).

equity REIT dividend cuts

On the docket of dividend boosts this week was net lease REIT STORE Capital (STOR), which declared a $0.36 dividend, a 2.9% increase from prior dividend of $0.35. Fellow net lease REITs Realty Income (O), W.P. Carey (WPC), and cannabis-focused Innovative Industrial (IIPR) all hiked distributions for the second time this year. Finally, while not a “true” dividend hike, Kite Realty (KRG) declared an $0.08 dividend, up from its prior rate of $0.052, but still below its pre-pandemic rate of $0.32 per share. We’ve now tracked 28 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.

dividend increases

Sticking in the net lease sector, Broadstone Net Lease (BNL) went public this week, raising roughly $570 million, the largest REIT IPO since the 2018 IPOs of casino REIT VICI Properties (VICI) and cold storage operator Americold Realty (COLD) and coming just weeks after the IPO of fellow net lease REIT NetSTREIT (NTST). Our partner Brad Thomas covered the IPO in a report published on the iREIT on Alpha Marketplace this week. We view the company as a direct peer to W.P. Carey, with a portfolio composed of industrial (44%), healthcare (20%), restaurants (15%), office (10%), and retail (9%) net leased properties. We discussed the net lease sector in a recent report: Net Lease REITs: Reopening Revival. The REIT IPO pipeline is likely to remain quiet for the balance of 2020 given the turbulent environment and steep NAV discounts across most sectors.

REIT IPO

As discussed in REITs: This Time Was Different, as it relates to REITs’ dividend-paying-ability, it all comes down to rent collection. Giving REITs the confidence to boost dividends has been steadily improving collection rates across essentially every property sector. We heard more a dozen rent collection updates this week highlighted by Tanger Factory Outlet (SKT), which surged more than 16% this week after reporting that it collected 81% of July rents while Q2 collections improved to 40% from 33% previously reported and foot traffic over the last six weeks has averaged 89% of prior-year levels. Meanwhile, the National Multifamily Housing Council’s Rent Tracker found that 86.2% of renters paid rent by September 13, which was a modest 2.4 percentage points lower from the collection rate last year and roughly in-line with prior months, suggesting that the predicted sharp drop in rent collection amid the “fiscal cliff” has not yet been borne out in the data.

rent collection REITs

We also heard business updates from several hotel REITs. Apple Hospitality (APLE), which owns a suburban-focused asset portfolio, announced that all 225 of its hotels are currently open and the company was “cash flow positive” in July with occupancy rising above 50% in the first week of September. Park Hotels & Resorts (PK) and Host Hotels & Resorts (HST), which both own a more urban-heavy hotel portfolio, announced occupancy of 18.9% and 32.3% in July, respectively, which was both notably higher than prior months. STR data has shown a steady improvement in national hotel occupancy to roughly 50% in August and these improved levels have held in recent weeks despite seasonal headwinds.

hotel occupancy

We heard some M&A news as well. Preferred Apartment Communities (APTS) is reportedly in advanced talks with TPG in which the private equity firm would buy an eight-property student housing portfolio from the REIT for about $480M, a portfolio that includes properties at Florida State, Baylor, and Arizona State. American Campus (ACC) finished higher by 5.0% this week after it announced that its portfolio is 90.3% leased for the 2020-2021 academic year, a rate far above the potentially catastrophic figures some investors feared given the lingering school shutdowns. As noted in Student Housing REITs: School’s Out Forever, students at these flagship universities in these “college towns” have shown a desire to live on-or-near campus regardless of whether classes are held physically in-session or completed remotely.

student housing REITs

Meanwhile, Apartment Investment and Management (AIV) finished flat this week after it announced plans to split into two separate publicly traded companies — a REIT that will be a pure-play apartment investment vehicle and the other company, Aimco, will focus on developing and redeveloping apartment communities. Apartment Income REIT (“AIR”) will be a “pure-play” apartment investment vehicle owning 26,599 apartment units and will not engage in development or redevelopment. AIR will have management and governance independent of Aimco and will be a self-managed real estate investment trust in all respects. AIR and Aimco each plan to have separate management teams located in separate offices. AIR will have the option, but not obligation, to engage in transactions with Aimco in the future. We discussed the sector in a recent report, Apartment REITs: Urban Exodus. apartment REIT fundamentals

Last but not least, American Tower (AMT) finished lower by 1.7% this week after it signed a new milestone multi-year agreement covering site access with T-Mobile (TMUS), which recently combined with Sprint to form a viable 3rd competitor in the U.S. cellular carrier industry along with AT&T (T) and Verizon (VZ). The companies expect that the new 15-year deal will enhance T-Mobile’s access to American Tower’s sites, while providing long-term revenue growth visibility to American Tower and also allowing T-Mobile to increase momentum on its rapid 5G deployment. We discussed trends in the sector in Cell Tower REITs: Fireworks Abound.

cell tower landscape

Mortgage REITs

Mortgage REITs rode an encouraging slate of dividend news and forbearance data to strong gains this week, pushing their rally from their early April lows to nearly 90%. Residential mREITs surged 5.9% while commercial mREITs finished higher by 2.9%, led by many of the most beaten-down mREITs. Three mREITs raised dividends this week including one “true” dividend raise to levels above pre-pandemic rates. Hunt Companies (HCFT) jumped 11.8% after it 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.

mREITs 2020

Ready Capital (RC) surged 17.2% after it declared a $0.30 dividend, a 20% increase from prior dividend of $0.25, but still below its pre-pandemic level of $0.40. New York Mortgage Trust (NYMT) jumped 8.5% after it declared a $0.075 dividend, a 50% increase from prior dividend of $0.050, but still below its pre-pandemic level of $0.20. Meanwhile, Ares Commerical (ACRE), Blackstone Mortgage (BXMT), and KKR Real Estate (KREF), all maintained payouts at current levels, which were consistent with pre-pandemic levels. Out of the 41 mREITs in our coverage, 31 reduced or suspended dividends, 8 have maintained, and 2 have raised as discussed in our mREIT Earnings Recap.

mortgage REIT dividend increases

REIT Preferreds

Last quarter, we published REIT Preferreds: Higher-Yield Without Excess Risk. The InfraCap REIT Preferred ETF (PFFR) ended the week higher by 0.1%. Digital Realty (NYSE:DLR.PK) announced this week that it is redeeming all of its Series G (DLR.PG) preferred stock on October 15. The issue had an initial call date in April 2018 and was trading at a slight premium to par value before the announcement. Last week, the firm announced the redeemed its Series I preferred stock (DLR.PI). Among REITs that offer preferred shares, the performance of these securities has been an average of 19.9% higher in 2020 than their 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.

rEIT preferreds

2020 Performance Check-Up

For the year, Equity REITs are now lower by roughly 17.7% and Mortgage REITs are off by 39.1% compared with the 2.7% gain on the S&P 500 and the 3.0% decline on the Dow Jones Industrial Average. Four of the eighteen REIT sectors are in positive territory for the year while on the residential side, four of the eight U.S. housing industry sectors in the Hoya Capital Housing Index are in positive territory for the year. The gap between the best-performing REIT sector – data centers – and worst-performing REIT sector – regional malls – remains a whopping 72% in 2020. At 0.69%, the 10-year Treasury yield (IEF) has retreated by 123 basis points since the start of the year and is roughly 255 basis points below recent peak levels of 3.25% in late 2018.

real estate performance

This week, we published Timber REITs: Literally On Fire. One of the best-performing REIT sectors this year, Timber REITs have nearly doubled since their mid-pandemic lows in March, reignited by a rejuvenation in the suddenly red-hot U.S. housing market. Housing has proven to be the “ultimate essential service.” Households have exhibited a propensity to prioritize housing-related payments and investments in home improvement and living situation upgrades amid the pandemic. Lumber prices have soared to record-highs from the combination of insatiable demand and reduced supply resulting from pandemic-related production shutdowns and forest fires raging in the Pacific Northwest. Rayonier (RYN) and Weyerhaeuser (WY) are the most “geographically exposed” REITs to the West Coast wildfires and both commented this week that direct impacts are not expected to be material, except for indirect impacts through lumber price increases.

timber reit geography 2020

This week, we also published Data Center REITs: Sunlight Through COVID Clouds. A “cloudy” future lies ahead, but that’s good news for data center REITs including Digital Realty, Equinix (EQIX), and CoreSite (COR). The physical epicenter of the “cloud,” data centers have been the best-performing property sector amid the pandemic. Clear winners of the work-from-home era, corporations will increasingly shift spending on physical office space towards “digital office space” through investments in remote-work infrastructure. Leasing activity – the most closely-watched earnings metric – surged in the second quarter to the highest level on record as the sector continues to ride substantial secular tailwinds. While expensive, the “essential” property sectors – technology, housing, and industrial – are the lone areas of reliable growth within the REIT sector.data center leasing

Next Week’s Economic Calendar

We have another busy slate of economic and housing data in the week ahead. On Tuesday, we’ll see Existing Home Sales for August. Last month, Existing Home Sales surged by 24.7%, which was the strongest monthly gain in the history of the survey and was the highest sales pace since December 2006. 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. Also on Wednesday, we’ll see the FHFA House Price Index, which has shown a 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.

real estate economic data

If you enjoyed this report, be sure to “Follow” our page to stay up to date on the latest developments in the housing and commercial real estate sectors. For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Real Estate Crowdfunding, High-Yield ETFs & CEFs, REIT Preferreds.

Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. Index definitions and a complete list of holdings are available on our website.

housing 100 index

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Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Hoya Capital Real Estate (“Hoya Capital”) is an SEC-registered investment advisory firm that provides investment management services to ETFs, individuals, and institutions, focusing on portfolio and index management of publicly traded securities in the residential and commercial real estate industries. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital’s Seeking Alpha Profile Page.

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. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.

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