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U.S. equity markets were mixed this past week as better-than-expected housing market data and "Goldilocks" employment data in the U.S. were offset by ongoing COVID concerns abroad over the "Delta" variant. "American Exceptionalism" was a timely theme ahead of the Independence Day weekend as the U.S. appears poised to expand its gains as the global leader of the post-pandemic economic recovery after surging COVID cases sent Sydney back into a lockdown and threatened to delay long-awaited reopenings across Europe.
(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)
Setting fresh record highs on seven straight days - the longest streak of record closes since 1997 - the S&P 500 (SPY) gained 1.7% on the week, but the Mid-Cap 400 (MDY) declined by 0.5% and the Small-Cap 600 (SLY) dipped 1.4%. Real estate equities were mixed as COVID-sensitive property sectors - hotels, retail, and office - were under pressure while "essential" sectors - housing and technology - led to the upside. The Equity REIT Index (REIT) finished lower by 0.4% with 15 of 19 property sectors in negative territory while the Mortgage REIT Index (REM) retreated 1.7%.
Despite the better-than-expected employment data stateside and signs of continued upward inflationary pressure across housing and energy markets, the 10-Year Treasury Yield flirted with its lowest level since early March. Ten of the eleven GICS equity sectors finished higher on the week, led to the upside by the Technology (XLK) and Communications (XLC) sectors while the Energy (XLE) sector lagged as a closely-watched OPEC output agreement remained in limbo. Homebuilders led the Hoya Capital Housing Index to gains following a slate of better-than-expected housing data showing a combination of robust homeownership demand and soaring rents.
Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.
The Bureau of Labor Statistics reported this week that the U.S. economy added 850k jobs in June - an acceleration following several months of disappointing data and above the consensus estimates of 700k. The strong BLS jobs report followed better-than-expected ADP Employment and Initial Jobless Claims data earlier in the week. The pace of hiring - the strongest in 10 months - comes as additional states have begun to phase out the supplemental pandemic-related unemployment benefits which - in some cases - resulted in higher pay than the employment alternative.
Easing some concerns over emerging labor shortages and its inflationary impact on wages, the hospitality and retail sectors led the recovery in June. However, hiring in goods-producing sectors including manufacturing, mining and logging, and construction was again disappointing despite historic shortages across many of these industries. The overall unemployment rate held steady at 5.8% as continued strength from the 26 states that have opted out of the enhanced federal unemployment benefits was offset by continued weakness from the 24 other states that continue to distribute the $1,200 federal supplemental on top of their state unemployment benefits.
"Goldilocks" trends in the labor markets may be particularly good news for the U.S. housing market, and data this week may be an early indication that strong employment growth, easing supply shortages, and retreating interests rates set the stage for a strong second-half of 2021 for the broader housing industry. The NAR reported this week that Pending Home Sales jumped 8% in May from the prior month - better than the 1% drop expected by analysts - and reversing a recent trend of cooling sales over the prior quarter. The level of Pending Sales in May - which is a forward-looking measure of housing market activity - was the highest for the month since 2005.
Robust housing demand has kept the "pedal to the metal" for home price appreciation as Case Shiller National Home Price Index data this week showed that home values soared 14.6% year-over-year in April - the 11th straight month of sequentially accelerating home prices - and the highest annual gain since late 2005. The FHFA Home Price Index, also released this week, showed a 15.7% jump in home values, the highest single month on record. Redfin (RDFN) data this week showed that a record 55% of homes were sold above their listing price over the past month while inventory levels remain near all-time lows. Nearly half of listed homes received an offer within one week while the average home sold was on the market for just 15 days.
Apartments: Multifamily rents are rising at the fastest levels on record according to fresh data this week from data provider Yardi as residential rents invariably "catch up" with the recent surge in home values across the country. Apartment rents rose 0.9% in May from the prior month which was the largest month-to-month average jump since Yardi Matrix started collecting rent data and comes after April posted the third-highest increase on record. Fresh data from Zillow (Z) this week also confirmed the acceleration as its ZORI Rent Index showed that rent growth in the median U.S. apartment market climbed to 5.7% in May with essentially all of the nation's top-60 markets reporting a sequential acceleration in rent growth in May.
Meanwhile, data from Real Capital Analytics this week indicated that U.S. property price growth accelerated in May, led by rising prices for apartment properties. The US National All-Property Index grew 0.8% in May from the prior month, 8.9% from a year ago. Apartment sector prices were the fastest growing in May at 10.1% year-over-year, overtaking industrial at 9.5%. Office price growth came in at 2.9% and the retail sector turned in a 2.3% annual gain. Within the office segment, suburban office properties rose 4.5% year-over-year increase while urban CBD office properties declined 5.5%.
Healthcare: The animal spirits are indeed alive in the REIT world as Ventas (VTR) - the second-largest healthcare REIT - announced this week that it will acquire New Senior Investment (SNR) in an all-stock deal worth $2.3B. New Senior - the smallest healthcare REIT by market capitalization - owns 103 private pay senior housing facilities totaling 12,404 units across 36 U.S. states. With the move, Ventas is effectively "doubling down" on the beaten-down senior housing sector, which has shown early signs of a post-pandemic comeback. The deal lifted its total Senior Housing exposure to 48% from 44%. Within that segment, Senior Housing Operating Portfolio ("SHOP") rises from 26% to 31% while Triple Net Lease ("NNN") ticks down from 18% to 17%.
This is a clear case, in our opinion, where the assets are worth considerably more when held within the Ventas portfolio than as a standalone entity. SNR's highly-levered balance sheet was a major concern throughout the pandemic, underscored by the roughly 80% plunge in SNR's stock between late February 2020 and early April 2020 and by SNR's 50% plunge in FFO last year. Ventas was perhaps a few quarters tardy on this transaction, but the valuation still appears fairly attractive, representing a roughly 6% capitalization rate based on SNR's projected 2022 NOI and is expected to be approximately $0.09 to $0.11 accretive to Ventas' normalized FFO on a full-year basis.
This deal follows several portfolio acquisitions earlier this month from fellow healthcare REIT, Medical Properties (MPW), and is the seventh major REIT-involved M&A deal since the start of April. In our quarterly State of the REIT Sector report last month, we projected that we'd see a wave of REIT M&A, fueled by premium valuations in the public markets. The deal is the fourth consolidation between two public equity REITs, joining shopping center REITs Kimco Realty (KIM) and Weingarten Realty (WRI), net lease REITs Realty Income (O) and VEREIT (VER), and office/industrial REITs Equity Commonwealth (EQC) and Monmouth (MNR).
Hotel: As discussed this week in Time To Get Away, following a brisk post-vaccine share price recovery, hotel REITs, and the broader hospitality industry have stalled over the last quarter amid renewed concerns over COVID variants. Hotel REITs are not out-of-the-woods, but we've become more bullish on the long-term outlook for domestic business travel and we discussed why we see pockets of value in leisure-oriented hotel REITs focusing on Sunbelt markets. Fueled by vaccines and fiscal firepower, the United States has emerged as the clear global leader of the post-pandemic economic recovery, powering a robust recovery in domestic leisure travel. TSA data showed that domestic travel recovered to 75% of pre-pandemic levels.
Also this week, data provider STR reported that gross operating profit for U.S. hotels reached 70% of the comparable 2019 level, according to its May 2021 monthly P&L data release. According to STR, 95% of hotels broke even on a GOP basis, while 73% broke even on a net income basis. For context, those percentages were 98% and 85% in May 2019. "Reopened" cities have seen the swiftest demand recovery with Tampa and Miami leading the way with occupancy rates and Revenue Per Available Room ("RevPAR") now above pre-pandemic levels while the coastal "shutdown cities" - New York, Boston, and San Francisco - continue to see depressed hotel occupancy rates.
Mortgage REITs were under pressure this week as residential mREITs declined 3.2% while commercial mREITs dipped 3.4%. Non-agency residential mREITs, including Invesco Mortgage (IVR) and Western Asset (WMC) were sharply lower after the U.S. Supreme Court declined a challenge to the Center for Disease Control's nationwide eviction moratorium which is set to expire at the end of July. Elsewhere, MFA Financial (MFA) closed on its previously announced acquisition of Lima One Holdings, an originator and servicer of business loans while Arbor Realty (ABR) closed on a $450 million multifamily mortgage loan securitization.
The InfraCap REIT Preferred ETF (PFFR) was higher by 1.0% this week and is now higher by 5.3% thus far in 2021. We saw a flurry of preferred issuance and redemption activity this week. New York Mortgage Trust (NYMT) priced a 6.875% Series F Fixed-to-Floating Preferred which will begin trading this month on Nasdaq under ticker NYMTL. ACRES Commercial (ACR) completed a 200,000 share follow-on offering of its 7.875% Series D Preferred (ACR.PRD). Elsewhere, American Homes 4 Rent (AMH) completed the previously announced redemption of its 6.350% Series E Preferred (AMH.PE).
Over in the bond markets, American Homes 4 Rent priced $450M of 2.375% Senior Notes due 2031 and $300M of 3.375% Senior Notes due 2051. DigitalBridge Group (DBRG) - formerly Colony Capital - priced an offering of $300M of 3.95% secured fund fee revenue notes. Elsewhere, Starwood Property (STWD) priced $400 million of 3.625% unsecured senior notes due 2026. In the most recent quarter, debt as a percent of enterprise value for the average REIT retreated back down below 33% by the end of Q1 after briefly climbing above 40% during the March sell-off.
As we pass the halfway point of 2021, Equity REITs are higher by 20.7% while Mortgage REITs have gained 16.3%. This compares with the 16.0% advance on the S&P 500 and the 17.6% 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, all eight sectors in the Hoya Capital Housing Index are higher. At 1.43%, the 10-year Treasury yield has climbed 51 basis points since the start of the year and is 91 basis points above its all-time closing low of 0.52% last August, but 182 basis points below its 2018 peak of 3.25%.
Among the ten major asset classes, REITs are now the third-best performing this year after briefly claiming the top spot last month, outpaced only by Small-Caps and Commodities (DJP). 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 11.8%. REITs lag only Small-Cap, Mid-Cap, and Large-Cap equities over this time, producing far superior total returns to Bonds (AGG), TIPS (TIP), Commodities, Emerging Markets (EEM), and International (EFA) stocks.
The economic calendar slows down a bit in the holiday-shortened week ahead. On Wednesday, we'll see Job Openings and Labor Turnover ("JOLTS") data for May. Last month, JOLTS data showed that job opening soared to record-highs of 9.3 million in April - higher than the total number of unemployed workers - as employers struggle to offer competitive wages relative to generous unemployment benefits offered by the state and federal government. We'll also be watching Jobless Claims data on Thursday and a flurry of Purchasing Managers' Index ("PMI") data throughout the week.
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.
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