Summary
- U.S. equity markets rallied to fresh record highs this past week as long-term interest rates retreated despite inflation data showing the highest annual rise in consumer prices in decades.
- A seemingly insatiable bid for Treasury Bonds - a counterintuitive trend that some analysts likened to a "short squeeze" - sent the 10-Year Treasury Yield lower for the fourth-straight week.
- Real estate equities led the way following a positive slate of REITweek updates and some major M&A news. Equity REITs rallied 2.5% on the week while Mortgage REITs gained 0.8%.
- Incredibly, the recent surge in CPI inflation has come despite any significant positive contribution from the largest component in the consumer basket - shelter - which the BLS only surveys every six months.
- Residential REITs confirmed that rents are soaring in early 2021 as the red-hot home ownership market has seemingly "passed the torch" to rental markets as double-digit rent growth is now commonplace across many regions.
- This idea was discussed in more depth with members of my private investing community, The REIT Forum. Learn More »
Real Estate Weekly Outlook
U.S. equity markets rallied to fresh record highs this past week as long-term interest rates retreated despite inflation data showing the highest annual rise in consumer prices in decades. A seemingly insatiable bid for U.S. Treasury Bonds - a counterintuitive trend that some analysts likened to a "short squeeze" in the most liquid asset class in the world - sent the 10-Year Treasury Yield lower for the fourth straight week while equity market volatility (VIX) declined to the lowest level since the pandemic began last February.
(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)
Rising for the third straight week and setting a fresh record high for the first time in a month, the S&P 500 (SPY) rallied another 0.4% on the week while the Mid-Cap 400 (MDY) and Small-Cap 600 (SLY) each gained 0.9%. Real estate equities led the way once again this week - continuing their strong performance this year - following a positive slate of REITweek updates and some major M&A news. The Equity REIT Index (VNQ) gained 2.5% on the week with 18 of 19 property sectors in positive territory while the Mortgage REIT Index (REM) gained 0.8%.
Meme-stocks and Bitcoin (BTC-USD) once again dominated the headlines throughout the week as several REITs were among the new targets of retail and hedge-fund-driven speculative trading activity. Six of the eleven GICS equity sectors finished higher on the week with Healthcare (XLV) and Technology (XLK) joining the Real Estate (XLRE) sector at the top of the leaderboard. Residential REITs led the Hoya Capital Housing Index to gains as rents continue to soar across the country, confirmed this week in a strong slate of REITweek updates as the red-hot home ownership market has seemingly "passed the torch" to the suddenly surging rental markets.
Real Estate Economic Data
Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.
The BLS reported this week that consumer prices rose at the faster annual rate in decades in May as WWII-levels of fiscal stimulus - much of it untargeted - have combined with surging demand from post-pandemic reopening, and have further clashed with supply constraints to drive a surge in prices. Core Consumer Prices - which excludes food and energy - rose 0.7% in May from last month and 3.8% from a year earlier, which was the largest annual increase since 1991. The headline CPI Index rose 0.6% from last month and 4.93% from last year, which was the highest since 2009. Driving the surge in May were the prices of used cars, furniture, clothing, and airline tickets.
Incredibly, the recent surge in inflation has come despite any significant positive recorded contribution from the largest component in the consumer basket - shelter. The BLS' CPI: Shelter price index - which averaged nearly 4% from 2015-2020 and was responsible for more than half of total consumer inflation in the 2010s - has actually weighed down the overall price index this year. The BLS' methodology only collects shelter data every six months while most other components are sampled monthly, so the Shelter Index not yet reflected the historic surge in home values and rents seen in early 2021. We estimate that actual CPI: Shelter inflation is running at 4-5%, which would push the headline inflation rate higher by a full percentage point.
Equity REIT Week In Review
Apartments: On that topic, we heard updates from the entire apartment REIT sector during REITweek which showed a dramatic acceleration in multifamily rents over the last two months. Double-digit rates of rent growth are now commonplace across not only the red-hot sunbelt and suburban markets but also the previously troubled urban markets as coastal-focused Equity Residential (EQR) noted that it has seen rents rise 17% from December 2020 to May 2021. Among sunbelt-focused REITs, NexPoint Residential (NXRT) reported that new leases were signed at 13.7% higher rates in May with blended rents rising 9.8% while Camden Property (CPT) reported 7.7% blended rent growth in May, and Centerspace (CSR) saw blended rent growth of 7.0%, all of which were among the strongest months on record.
Single Family Rentals: As discussed this week in PropTech Revolution, the positive reverberations from the post-pandemic "housing boom" are now being felt in full force across single-family rental markets as well. Invitation Homes (INVH) significantly boosted its full-year guidance in its REITweek update and now sees AFFO growth of 13% this year. Before the upward revision in Q1, INVH expected growth of roughly 5%. Soaring rents are powering this surge as INVH reported record-high rent growth of 14.1% on new leases in May and 5.9% on renewals, translating to an 8.1% blended increase. American Homes (AMH) noted in its REITweek update that it achieved rent growth of 12.7% on new leases and 5.3% on renewals for a blended rate of 7.6%.
As discussed last week in REITs Getting Short Squeezed, REITs have been active participants in "meme mania" over the last month as many of the most troubled and heavily shorted REITs continue to experience extreme price moves driven by retail and hedge-fund-driven speculative trading activity. The REIT Squeeze Index - comprised of the 20 most heavily shorted REITs - rose another 8% this week. Prison REIT Geo Group (GEO) - the single most heavily-shorted REIT - soared another 25% while troubled mall REIT Pennsylvania REIT (PEI) and small-cap REITs Colony Capital (CLNY) and CorEnergy (COR) each rallied more than 8%.
Data Center: QTS Realty (QTS) surged 21% after announcing that it will be acquired by Blackstone (BX) in an all-cash deal at $78/share, representing a roughly 21% premium to QTS' closing stock price of $64.49 last week. Upon completion of the transaction, which is expected to close in 2H 2021 - QTS will be delisted and jointly owned by Blackstone Infrastructure Partners and Blackstone Real Estate Income Trust, a non-traded REIT. Last month in our data center REIT report, we commented that "we see M&A as a potential catalyst this year" as the recent underperformance of the smaller REITs - CONE, COR, and QTS - "put them back in play" for a potential acquisition. The deal is the sixth major REIT-involved deal over the past two months.
Shopping Center: Amid all the REITweek newsflow and M&A developments, we also heard fiscal Q2 earnings results from shopping center REIT Urstadt Biddle (UBA), which gained nearly 7% on the week after reporting that same-store NOI rose 13.3% from the same quarter last year, which was a very positive read-through for the shopping center REIT sector. Last week, UBA boosted its quarterly dividend to $0.207/share, up from its prior $0.14 rate. We analyzed recent Q1 results across the shopping center REIT sector last week in The New Hub of E-Commerce which explained why the long-term outlook for open-air strip centers is far more promising than their enclosed regional mall peers.
Office: Finally, this week we published Office REITs: No Going Back. Vaccines are here, masks are off, and sports stadiums are full. Office desks around the country remain eerily empty, however, as office utilization rates remain a fraction of pre-COVID levels. For many corporations, there's no going back - at least not to pre-COVID norms. Survey data revealed that office workers would accept pay cuts before returning to the 5-day in-person workweek. While the office isn't going away entirely, hybrid work environments - which require less office space - are increasingly standard. Commute times and cost-of-living factors are playing a major role in determining which markets recover faster.
Mortgage REIT Week In Review
Mortgage REITs gained for the fourth-straight week as residential mREITs finished higher by 4.3% while commercial mREITs gained 4.2%. With this week's gains, the Mortgage REIT Index has now recovered to pre-pandemic levels after having plunged nearly 80% at the outset of the pandemic. Following similar trends as their equity REIT peers, Invesco Mortgage (IVR) and Western Asset (WMC) - two of the most heavily shorted mREITs - led the way on the week. AGNC Investment (AGNC) was a laggard this week after it estimated that its book value per share declined in May.
The wave of dividend boosts continued across the mREIT sector this week with two more REITs raising their payouts. Ellington Residential (EARN) jumped nearly 7% on the week after it boosted its dividend by 7.1% while Redwood Trust (RWT) rallied more than 4% after it boosted its dividend by 12.5%. Nineteen mREITs have now raised their dividends thus far in 2021 as residential mREITs now pay an average dividend yield of 8.0% while commercial mREITs pay an average dividend yield of 6.5%.
REIT Preferreds & Capital Raising
The InfraCap REIT Preferred ETF (PFFR) was higher by 0.4% this week and is now higher by 3.9% thus far in 2021. There was no shortage of activity across the REIT preferred market this week as Public Storage (PSA) priced its 4.00% Series P Preferred (PSA.PP) and concurrently completed the redemption of its 5.125% Series C Preferred (PSA.PC). TPG RE Finance (TRTX) priced its 6.25% Series C Preferred (TRTX.PC) and plans to use the proceeds to partially fund the redemption its Series B Preferred. Elsewhere, nano-cap Presidio Property (SQFT) priced its 9.375% Series D Preferred (SQFTP) while single-family rental REIT American Homes (AMH) also completed the previously announced redemption of its 6.5% Series D Preferred (AMH.PD).
Over in the bond markets, hotel REIT RLJ Lodging (RLJ) priced an upsized offering of $500M of 3.750% senior secured notes due July 1, 2026, while mortgage REIT Ladder Capital (LADR) priced $650M of 4.750% Senior Notes due 2029. REITs have used lower interest rates this year to extend their debt maturities to over 7.25 years, on average, and to lower their average long-term interest rate from 3.76% to 3.65% - the lowest level on record. Debt as a percent of enterprise value retreated back down below 33% by the end of Q1 after briefly climbing above 40% during the March sell-off.
2021 Performance Check-Up
Thus far in 2021, Equity REITs are higher by 23.7% while Mortgage REITs have gained 17.9%. This compares with the 13.5% advance on the S&P 500 and the 19.6% gain on the S&P Mid-Cap 400. All nineteen REIT sectors are now in positive territory for the year, while on the residential side, seven of the eight sectors in the Hoya Capital Housing Index are higher. At 1.46%, the 10-year Treasury yield has climbed 55 basis points since the start of the year and is 94 basis points above its all-time closing low of 0.52% last August, but 179 basis points below its 2018-peak of 3.25%.
Among the ten major asset classes, REITs are now the third-best performing this year, trailing only Commodities (DJP) and Small-Caps (SLY). Despite the rough 2020 in which REITs were the worst-performing asset class, REITs are still the fourth best-performing asset classes since the start of 2010, producing average annual total returns during this time of 12.1%. REITs lag only Small-Cap, Mid-Cap, and Large-Cap equities over this time period, producing far superior total returns to Bonds (AGG), TIPS (TIP), Commodities (DJP), Emerging Markets (EEM), and International (EFA) stocks.
Economic Calendar In The Week Ahead
We have a jam-packed week of economic and housing data in the week ahead. On Tuesday, we'll see Producer Price Index data for May which is expected to show the highest rate of producer inflation in several decades. We'll also see Retail Sales data for May. Housing data begins on Tuesday with the NAHB Homebuilder Sentiment Index for June and on Wednesday, we'll see Building Permits and Housing Starts data for May which is expected to show that new home construction activity remains near 15-year highs. Also on Wednesday, we'll hear commentary from the Federal Reserve, along with their interest rate decision at the conclusion of their two-day FOMC meeting.
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, Cannabis, 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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks
