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  • Alex Pettee, CFA

China Rate Cut • Manufacturing 'Plummet' • Cannabis Rebound

  • U.S. equity markets advanced Monday as weak economic data in China and a NY Fed survey showing a "plunge" in manufacturing activity sent benchmark interest rates and commodities prices lower.

  • Seeking to extend a four-week winning streak, the S&P 500 advanced 0.4% today - cutting its 2022 declines to under 10% - while the tech-heavy Nasdaq 100 advanced nearly 1%.

  • Real estate equities were mostly higher today amid a rotation back into some of the more defensive property sectors following a busy earnings season. The Equity REIT Index advanced 0.4%.

  • The beaten-down cannabis REIT sector led the gains today following strong results last Friday afternoon from Power REIT (PW), which rallied nearly 10% on the session after reporting progress on its efforts to receive cannabis licensing from the state of Michigan.

  • The state of the housing market will be in focus in the week ahead with a trio of reports expected to show a continued cool down in activity over the past month, but high-frequency indicators have shown signs of a near-term "bottoming" as mortgage rates have moderated.

 

Real Estate Daily Recap

U.S. equity markets advanced Monday as - consistent with the recent "bad news is good news theme - weak economic data in China and a New York Fed survey showing a "plunge" in manufacturing activity in the U.S. sent benchmark interest rates and commodities prices lower. Looking to extend a four-week winning streak, the S&P 500 advanced 0.4% today - cutting its 2022 declines to under 10% - while the tech-heavy Nasdaq 100 advanced nearly 1%. Real estate equities were mostly higher today amid a rotation back into some of the more defensive property sectors following a busy earnings season. The Equity REIT Index advanced 0.4% with 13-of-18 property sectors in positive territory while the Mortgage REIT Index declined 0.2%.

Data released by China over the weekend showed a deepening economic slowdown in July with retail sales, industrial output, and investment all missing economists' estimates, prompting an unexpected rate cut in several key lending rates by China's central bank. Stateside, investors were greeted with similarly disappointing economic news this morning with the New York Fed’s Empire State manufacturing survey showing "plummeting" activity in August with the second largest monthly decline on record and among the lowest levels in the survey’s history. Crude Oil prices retreated to the lowest level since February while the 10-Year Treasury Yield retreated to 2.79% - down 6 basis points on the day and significantly below its June peak of 3.50%.


The state of the housing market will be in focus in the week ahead with a trio of reports expected to show a continued cool down in activity over the past month, reflecting the surge in mortgage rates which climbed to nearly 6% in late June before moderating in recent weeks. On Monday, we saw Homebuilder Sentiment data which showed the lowest print in four years excluding the brief pandemic dip in April and May 2020. On Tuesday, we'll see Housing Starts and Building Permits data which is expected to show a continued moderation in the pace of new home construction, particularly within the single-family segment. On Thursday, we'll see Existing Home Sales data which is expected to slow to the lowest rate since June 2020. There are some early signs that the recent dip in mortgage rates, moderating home prices, and slightly higher inventory levels shave pulled some potential buyers back into the fold in recent weeks, however, as the Redfin Homebuyer Demand Index has rebounded 17% from the week of June 19 when mortgage rates peaked. We'll also see Retail Sales data on Wednesday and will be watching Jobless Claims data on Thursday.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Cannabis: The beaten-down cannabis REIT sector led the gains today following strong results last Friday afternoon from Power REIT (PW), which rallied nearly 10% on the session after reporting progress on its efforts to receive cannabis licensing from the state of Michigan, which was held-up by the local township on disputes over a Certificate of Occupancy. The Michigan greenhouse property represents the single largest asset in terms of potential income generation within Power REIT’s existing portfolio, amounting to an incremental potential FFO of $0.38 per share per quarter according to the company. Power REIT also noted that it made progress in its "pivot" focus on greenhouses rather than warehouse-style indoor cultivation facilities. PW has acquired 2.2 million square feet of greenhouse space - of which 51% is focused on food cultivation while 49% is on cannabis cultivation.

Homebuilders: Last Friday, we published Homebuilders: Short Term Pain, Long-Term Gain which discussed our updated outlook for the sector and recent portfolio allocations. As goes the U.S. housing industry, so goes the U.S. economy. The sharp cooldown in housing market activity in the first half of the year had substantial ramifications for broader economic growth - and in fact, essentially single-handled pulled the U.S. into a technical recession in early 2022. These discounted valuations may have been justified if mortgage rates continued their extraordinary surge seen in early 2022 - a surge that rapidly turned the housing market from red-hot to icy-cold - but the housing market looks markedly different with rates in the 4% range compared to the 6% range. While not out of the woods yet given the ongoing uncertainty over the path of inflation - which ultimately dictates the path of Fed policy and mortgage rates - we believe that the risk-reward for the homebuilding sector is now skewed heavily to the upside.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mixed today with residential mREITs slipping 0.1% while commercial mREITs advanced 0.5%. On a slow day of mREIT newsflow, ACRES Realty (ACR) and Sachem Capital (SACH) led to the upside while Western Asset (WMC) and Hannon Armstrong (HASI) lagged. As discussed in our REIT Earnings Recap, mortgage REITs have rebounded sharply since mid-June as mortgage-backed bonds (MBB) have caught a bid following a brutal first-half of 2022.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished higher by 0.01% today, on average. REIT Preferreds are lower by roughly 5% on a total return basis this year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now roughly 180 REIT-issued exchange-listed preferred and debt securities with an average current yield of roughly 6.75%.

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.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.


This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.


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