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REITs Stumble Into 2020 by Brad Thomas

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Summary

  • The holiday season continues to be quite merry for investors. US equity markets notched a fifth straight week of records, climbing for the 11th week out of the past 12.
  • The "melt-up" continued as the S&P 500 climbed another 0.6% on the week, pushing the index's 2019 total return to roughly 30%, on pace for its best year since 1997.
  • After a strong start to 2019, the "Real Estate Rejuvenation" has stalled-out over the last quarter. The domestically-focused REITs and Homebuilders have missed out on the fourth-quarter "melt-up."
  • Underperforming the S&P 500 by roughly 12% in Q4, investors have shifted away from the defensive and yield-oriented REIT sector as the global economic growth outlook has improved.
  • For Homebuilders, the strong trends for New Home Sales continued in November. Sales topped 719k last month, representing a nearly 17% year-over-year jump from last year.
  • This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Weekly Outlook

The holiday season continues to be a quite merry one for investors, a far more relaxing one for asset managers following last year's extreme volatility during the Christmas season. US equity markets notched a fifth straight week of records, climbing for the 11th week out of the past 12. While economic data and news flow were fairly sparse on the holiday-shortened week, the early returns on holiday spending were strong as retail sales rose 3.4% from November 1 through December 24th according to Mastercard SpendingPulse data, led by an 18.8% jump in e-commerce sales, but traffic at brick and mortar locations was essentially flat from last year.

(Hoya Capital, Co-Produced with Brad Thomas through iREIT on Alpha)

The "melt-up" continued as the S&P 500 ETF (SPY) climbed another 0.6% on the week, pushing the index's 2019 total return to roughly 30%, on pace for its best year since 1997. Under pressure for most of the past quarter, bonds and bond-like instruments were generally higher on the week as the 10-Year Treasury Yield (IEF) retreated by 5 basis points to close the week at 1.87%. The broad-based commercial Real Estate ETF (VNQ) gained 0.5% on the week, led by the retail and net lease REIT sectors while the residential real estate-focused Hoya Capital Housing Index climbed 0.1%, led by the real estate technology, mortgage lenders, and home furnishing sectors.

After a strong start to 2019, however, the "Real Estate Rejuvenation" has stalled-out over the last quarter. The domestically-focused REITs and Homebuilders have missed out on the fourth quarter "melt-up" as investors have shifted into more of a "risk-on" mode after the most pressing sources of economic uncertainty were largely resolved over the past two months, headlined by the "truce" in the China/U.S. trade war. Underperforming the S&P 500 by roughly 12% in Q4, investors have shifted away from the defensive and yield-oriented REIT sector as the global economic growth outlook has improved. Despite a stumble to the finish line, 2019 will still mark the best year for REITs since 2014 while the single-family homebuilders will have recovered all of last year's declines.

Interestingly, excluding the struggling mall sector, REITs are set to outperform the S&P 500 by several percentage points this year on a total return basis. As discussed in Mall REITs: Do or Die Time, this holiday season marks a critical period for lower-productivity mall REITs which continue to teeter on the edge of relevancy in a world increasingly dominated by e-commerce. While higher-productivity malls have maintained steady occupancy and are seeing solid rent growth, the bifurcation in performance has widened between the higher and lower-tier malls this year. Highlighting that trend, this week, high productivity mall REIT Simon Property (SPG) was among the top-performers but lower-tier mall REITs CBL & Associates (CBL) and Washington Prime (WPG) were among the worst performers.

...Originally Posted On Seeking Alpha

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