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  • Alex Pettee, CFA

China Economic Skid • Sell-Off Deepens • Week Ahead

  • U.S. equity markets remained under pressure Monday in another choppy session as dismal Chinese economic data and weaker-than-expected domestic manufacturing data amplified recession concerns.

  • Entering the session on a six-week losing streak- its longest since 2021- the S&P 500 declined another 0.4% today while the tech-heavy Nasdaq 100 extended its drawdown to nearly 26%.

  • Real estate equities were mixed as the Equity REIT Index declined by 0.6% today with 10-of-19 property sectors in negative territory but Mortgage REITs advanced 0.3%.

  • China’s industrial output and consumer spending slid to the worst levels since the pandemic began as China's "COVID Zero" - and resulting lockdowns across major manufacturing hubs - has further clouded the outlook for supply chain normalization and broader global economic growth.

  • Housing data highlights the economic calendar in the week ahead which investors and the Fed will be watching carefully for indications of the impact of surging mortgage rates on housing demand.

Income Builder Daily Recap

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U.S. equity markets remained under pressure Monday in another choppy session as dismal Chinese economic data and weaker-than-expected domestic manufacturing data amplified recession concerns. Entering the session on a six-week losing streak - its longest since 2021 - the S&P 500 declined another 0.4% today while the tech-heavy Nasdaq 100 dipped another 1.2% to extend its drawdown to over 26% and the Dow declined for the seventh time in eight sessions. Real estate equities were mixed today as the Equity REIT Index declined by 0.6% with 10-of-19 property sectors in negative territory but Mortgage REITs advanced 0.3%.

Data overnight showed that China’s industrial output and consumer spending slid to the worst levels since the pandemic began as China's "COVID Zero" policy - and resulting lockdowns across major manufacturing hubs - has further clouded the outlook for supply chain normalization and broader global economic growth. Concerns over slowing growth have put a lid - for now - on longer-term interest rates as the 10-Year Treasury Yield declined another 6 basis points to 2.88% after climbing above 3.20% last Monday. Seven of the eleven GICS equity sectors were lower today, dragged on the downside by the Consumer Discretionary (XLY) and Technology (XLK) sectors while Energy (XLE) led the way as Crude Oil prices jumped back above $114/barrel.

Housing data highlights the economic calendar in the week ahead which investors and the Fed will be watching carefully for indications of the impact of surging mortgage rates on housing demand. On Tuesday, we'll Homebuilder Sentiment which is expected to show a moderation to 75. On Wednesday, we'll see Housing Starts and Building Permits which are also expected to moderate from last month's stronger-than-expected levels. On, Thursday we'll see Existing Home Sales data which is expected to show a more pronounced pull-back to a 5.53M annualized rate, which would be the lowest since June 2020. We'll also see Retail Sales data on Tuesday and hear a half-dozen scheduled Federal Reserve member speeches or events including remarks from Chair Powell on Tuesday.

Real Estate Daily Recap

Malls: This afternoon, we heard results from CBL Properties (CBL) - its third quarterly report since emerging out of Chapter 11 bankruptcy last November. Results were generally in-line with expectations and consistent with trends across the sector reported last week. Positively, CBL recorded a 290 basis point increase in portfolio occupancy which helped to drive a 10.7% year-over-year increase in same-center NOI. Rental rates remain under pressure, however, as renewal spreads dipped another 11.8% - in part due to a shift towards higher use of "percentage rent" in lease agreements, which can result in higher rent payments when times are good, but sharper declines in rent during downturns in retail spending. We'll discuss these results - and our post-earnings season outlook for the sector - in our Mall REIT report published tonight on Income Builder.

This morning, NAREIT published its quarterly T-Tracker data which compiles REIT fundamentals over the past quarter. As we'll discuss in more detail in our State of the REIT Nation report published later this week, REIT company-level metrics have continued to exhibit a substantial rebound over the last six quarters as REIT FFO ("Funds From Operations") has now fully recovered the sharp declines from early in the pandemic. In the first quarter, REIT FFO was 10% above its 4Q19 pre-pandemic level on an absolute basis and was 3% above its pre-pandemic levels on a per-share basis. Driven by an 8.41% rise in same-store Net Operating Income ("NOI") - the strongest quarter of property-level growth on record - FFO/share rose 30.2% in Q1 over the prior year.

Data Center: Last Friday, we published Data Center REITs: Tech Wreck Opportunities. Unable to avoid the broader 'Tech Wreck', Data Center REITs are among the worst-performing real estate sectors this year with declines of nearly 30% - their steepest drawdown on record. Cloud computing demand remains insatiable and has historically been unaffected by uncertain economic conditions, but this "steadiness" has been a burden amid a sharp 'growth-to-value' rotation within the REIT sector. Valuations now appear quite attractive for these perennial performance leaders, however, particularly given the red-hot M&A environment and earnings results showing record levels of leasing demand and renewed pricing power. Similar selloffs in 2014 and 2018 amid rising rate concerns ultimately proved to be rewarding buying opportunities for data center REITs and we see the Preferred securities as a particularly compelling high-yield opportunity.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mostly-higher today on a relatively slow day of newsflow as commercial mREITs gained 0.9% while residential mREITs advanced 0.2%. In our Earnings Recap published last week, we noted that mREITs have been an upside standout over the past several weeks after earnings season showed that Book Value declines were generally not as steep as analysts projected. Residential mREIT Book Value Per Share ("BVPS") metrics declined by 8.4%, on average, in Q1 with a range of +10% to -28%. Book value changes across the commercial mREIT space were more muted with an average BVPS increase of 0.1% ranging from a high of 3.8% to a low of 1.9%.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, the Hoya Capital REIT Preferred Index finished higher by 0.41% today. REIT Preferreds ended 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now 180 REIT-issued exchange-listed preferred and debt securities with an average current yield of roughly 6.80%. In the capital markets today, ground lease specialist Safehold (SAFE) launched a private placement of $150M of 5.15% senior unsecured notes due May 13, 2052 and intends to use the proceeds to repay debt and for general corporate purposes. Elsewhere, Moody’s Ratings affirmed Rayonier's (RYN) “Baa3” credit rating and assigned a stable outlook.

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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.