Good News, Bad News On Inflation

• U.S. equity markets rallied to their best week since July as a strong start to corporate earnings season and a solid slate of economic data temporarily eased investor jitters over potential stagflation.

• Rebounding for the second-straight week following a rough September, the S&P 500 gained 1.8% this week while the MidCap 400 rallied 2.2% and the Small Cap 600 rose 0.4%.

• Real estate equities - particularly residential REITs - led the charge this week with gains of more than 3% as logistics giant Prologis kicked off earnings season with another stellar report.

• Hidden beneath another month of soaring inflation rates on food, energy, and rents, there were some potential glimmers of "good news" with signs that we may currently be seeing the worst of the price pressures.

• Meanwhile, strong retail sales data and improving jobless claims were juxtaposed with an unexpected slump in consumer confidence and a record surge in workers quitting their jobs.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.

Homebuilders Rebound • REIT Earnings • Week Ahead

Summary

• U.S. equity markets were mostly higher Monday ahead of a jam-packed week of corporate earnings reports and economic data as investors access headwinds from supply shortages and cost pressures.

• Following gains of nearly 2% last week, the S&P 500 climbed another 0.3% today while the Mid-Cap 400 finished higher by 0.2% and the Small-Cap 600 slipped 0.1%.

• Real estate equities - which gained nearly 4% last week - were mostly higher again today as the Equity REIT Index gained 0.2% with 11-of-19 property sectors in positive territory.

• Homebuilder confidence jumped in October, rising 4 points to 80 as accelerating home buyer demand offset ongoing supply chain headwinds. All three of the index’s three components rose at least 3 points in October.

• Small-cap CatchMark Timber (CTT) remained under pressure today after providing a business update last week in which it exited a troubled joint venture deal and cut its dividend - one of just 3 REITs that has lower its dividend this year.

Real Estate Daily Recap

U.S. equity markets were mostly higher Monday ahead of a jam-packed week of corporate earnings reports and economic data as investors access headwinds from supply shortages and cost pressures. Following gains of nearly 2% last week, the S&P 500 climbed another 0.3% today while the Mid-Cap 400 finished higher by 0.2% and the Small-Cap 600 slipped 0.1%. Real estate equities - which gained nearly 4% last week - were mostly higher again today as the Equity REIT Index gained 0.2% with 11-of-19 property sectors in positive territory while Mortgage REITs gained 0.3%.

As discussed in our Real Estate Weekly Outlook, markets are coming off their best week since July as a strong start to corporate earnings season and a solid slate of economic data temporarily eased investor jitters over potential stagflation The momentum continued today as seven of the eleven GICS equity sectors were higher, led to the upside but the Consumer Discretionary (XLY), Technology (XLK), and Communications (XLC) sectors. Homebuilders and the broader Hoya Capital Housing Index were among the leaders today following better-than-expected Homebuilder Sentiment data and ahead of a busy week of earnings reports and housing market data.

The NAHB reported today that homebuilder confidence jumped in October, rising 4 points to 80 as accelerating home buyer demand offset ongoing supply chain headwinds. All three of the index’s three components rose in October with current sales jumping 5 points to 87, sales expectations increasing 3 points to 84, and buyer traffic climbing 4 points to 65. Last Friday in Shortages Everywhere, we discussed how surging rents - and a desire for an inflation-hedging asset - have again sparked recent demand. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates and given recent signs of a late-year reacceleration in demand.

We have a jam-packed week of economic and housing data in the week ahead, continuing on Tuesday when we'll see Housing Starts and Building Permits data for September which is expected to show that construction activity accelerated modestly last month as supply chain constraints slowly ease at the margins. On Thursday, the National Association of Realtors releases Existing Home Sales data which is expected to show an acceleration back above the 6M annualized rate following a late-summer cooldown. We'll also be monitoring a flurry of Purchasing Managers Index ("PMI") data throughout the week.

Equity REITs & Homebuilders

As we'll analyze our Real Estate Earnings Preview report published tomorrow, real estate earnings season kicks off this week, and over the next month, we'll hear results from more than 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. The report will discuss the major themes and metrics we'll be watching across each of the real estate property sectors this earnings season in what will surely be another newsworthy and potentially volatile several weeks for the red-hot real estate sector. Highlights of this week's earning slate include Equity LifeStyle (ELS), Crown Castle (CCI), Rexford (REXR), First Industrial (FR), Alpine Income (PINE) and Safehold (NYSE:SAFE).

Timber: Small-cap CatchMark (CTT) - which plunged last week after providing a business update in which it noted it has exited its troubled Triple T joint venture and slashed its dividend - dipped another 7% today. CatchMark initially contributed $200m of the $1.39B total investment to begin the Triple T joint venture alongside other institutional investors in 2018. As part of the agreement, CTT collected fees representing roughly 10% of its revenues for managing 1.1 million acres of timberlands in Texas. An unprofitable business deal for CTT from early on, the $35m exit value was below what investors expected and it appears some are questioning the previous valuations of CTT's equity interest in the JV presented by the company. Weyerhauser (WY) and PotlatchDeltic (PCH) have been our preference in the Timber REIT space due to the vertical integration along the lumber supply chain.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly higher today as commercial mREITs gained 0.7% following gains of 2.0% last week. Residential mREITs gained 0.4% after climbing 0.7% last week. Sachem Capital (SACH) and NexPoint Real Estate (NREF) were among the leaders today while Hannon Armstrong (HASI) and ACRES Realty (ACR) lagged. The average residential mREIT now pays a dividend yield of 8.48% while the average commercial mREIT pays a dividend yield of 6.5%.

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The REIT Forum is now the exclusive home to Hoya Capital premium research. Visit our website and join our email list for quick access to our real estate research library: HoyaCapital.com where we have links all of our real estate sector reports and daily recaps. You can also follow our real-time commentary on Twitter, LinkedIn, and Facebook.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.

Strong Week For REITs • Retail Rebound • Earnings Begin

Summary

• U.S. equity markets continued their rally Friday - completing their best week since July - following a strong slate of corporate earnings results and better-than-expected retail sales figures.

• Gaining nearly 2% on the week, the S&P 500 climbed 0.8% today while the Mid-Cap 400 finished higher by 0.1% but the Small-Cap 600 slipped 0.1%.

• Real estate equities - which gained nearly 4% on the week - were mixed today as the Equity REIT Index finished lower by 0.1% with 11-of-19 property sectors in positive territory.

• Prologis (PLD) was higher today after the logistics giant kicked off REIT earnings season this morning with a strong report, beating consensus estimates and boosting its 2021 guidance. REIT earnings season heats up next week.

• Despite slumping consumer confidence, Retail Sales were stronger than expected in September, advancing 0.7% from the prior month and 13.9% from last September. Consumer inflation expectations, however, reached fresh 12-year highs.

Real Estate Daily Recap

U.S. equity markets continued their rally Friday - completing their best week since July - following a strong slate of corporate earnings results and better-than-expected retail sales figures. Gaining nearly 2% on the week, the S&P 500 climbed 0.8% today while the Mid-Cap 400 finished higher by 0.1% but the Small-Cap 600 slipped 0.1%. Real estate equities - which gained nearly 4% on the week - were mixed today as the Equity REIT Index finished lower by 0.1% with 11-of-19 property sectors in positive territory while Mortgage REITs declined by 0.1%.

A solid start to third-quarter corporate earnings season helped to relieve some jitters over potential "stagflation" while inflation reports this week indicated that we may currently be seeing the worst of the price pressures. Five of the eleven GICS equity sectors were higher today, led to the upside by the Consumer Discretionary (XLY), Financials (XLF), and Industrials (XLI) sectors. We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

The Commerce Department reported this morning that Retail Sales were stronger-than-expected in September, advancing 0.7% from the prior month and 13.9% from last September. An outlier in an otherwise soft slate of consumer data over the past month, spending on back-to-school and back-to-the-office items appeared to be behind the strength. Spending at book and music stores jumped nearly 4% from the prior month while spending at general merchandise stores rose 2%. Reflecting an increased worry among consumers and investors, however, spending at gasoline stations jumped 1.8% from the last month and was higher by nearly 40% from the prior year, the highest among any retail category.

On that point, ongoing concerns over inflation and anxiety over lingering COVID restrictions have weighed heavily on consumer and business confidence over the past three months, sending the University of Michigan’s consumer sentiment index tumbling to 10-year lows this summer. After a small recovery in September, sentiment dipped yet again in the preliminary October reading. The report noted the declines in confidence were due almost entirely to complaints about rising prices. Also in the report, data showed that consumers expect inflation to rise 4.8% over the coming year, the highest since 2008.

Equity REITs & Homebuilders

Homebuilders: Today, we publish Shortages Everywhere which discussed recent trends in the homebuilding sector. Homebuilders - which emerged as unexpected leaders early in the pandemic - dipped into "bear market territory" in early October as supply chain headwinds, soaring home prices, and rising rates spooked investors. Record-low supply levels and robust single-family housing demand sent home prices soaring, discouraging potential buyers. Surging rents - and a desire for an inflation-hedging asset - have again sparked recent demand. Housing remains a deeply “unloved” sector despite the compelling long-term tailwinds at its back. Remarkably, homebuilders trade with single-digit forward P/E multiples despite their strong projected growth rates.

Industrial: Prologis (PLD) was higher today after the logistics giant kicked off REIT earnings season this morning with a strong report, beating consensus estimates and boosting its 2021 guidance. PLD raised its full-year same-store NOI growth outlook to 5.9% at the midpoint, up roughly 40 basis points from its prior outlook, and raised its FFO outlook to 8.4%, up 160 basis points from its prior outlook. Despite increasingly empty shelves, average occupancy in Q3 increased 60 basis points from Q2 to 96.6%. Prologis CFO commented, "Most of the benefit from the current environment will accrue to the future given our 22% in-place-to-market rent spread."

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly lower today as commercial mREITs slipped 0.3% but finished the week higher by 2.0%. Residential mREITs declined 0.7% but were higher by 0.7% on the week. Redwood Trust (RWT) was little changed today after it announced its latest PropTech investment in Canopy Financial Technology Partners, a due diligence and third-party review fintech firm. Earlier this month, RWT announced an investment in rental ownership platform Flock Homes and a venture with Point on a new form of home equity securitization. The average residential mortgage REIT now pays a dividend yield of 8.48% while the average commercial mortgage REIT pays a dividend yield of 6.67%.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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Join our Mailing List on our Website

The REIT Forum is now the exclusive home to Hoya Capital premium research. Visit our website and join our email list for quick access to our real estate research library: HoyaCapital.com where we have links all of our real estate sector reports and daily recaps. You can also follow our real-time commentary on Twitter, LinkedIn, and Facebook.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds 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 and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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.