• Alex Pettee, CFA

Inflation Stays Hot • Fed Unfazed • REIT M&A

Summary

  • U.S. equity markets were mixed Wednesday after Fed Chair Powell reiterated a "dovish" stance of easy monetary policy following PPI data showing the fastest rise in producer prices on record.

  • Climbing back into positive territory for the week, the S&P 500 finished higher by 0.2% today but the Mid-Cap 400 retreated 0.6% and the Small-Cap 600 dipped 1.1%.

  • Real estate equities were among the leaders today as interest rates pulled back with the Equity REIT Index gaining 0.7% with 17-of-19 property sectors in positive territory.

  • Inflation Stays Red Hot. The BLS reported this morning that the Producer Price Index surged 7.3% for the 12 months ending in June, the fastest increase since the agency began tracking the data in 2010.

  • It was a busy day of REIT-involved deals as Boston Properties and Digital Realty each announced separate joint-venture deals while mortgage REIT Sachem Capital plans to launch a new SPAC.

Real Estate Daily Recap

U.S. equity markets were mixed Wednesday after Fed Chair Powell reiterated a "dovish" stance of easy monetary policy following PPI data showing the fastest rise in producer prices on record. Climbing back into positive territory for the week, the S&P 500 finished higher by 0.2% today but the Mid-Cap 400 retreated 0.6% and the Small-Cap 600 dipped 1.1%. Real estate equities were among the leaders today as interest rates pulled back with the Equity REIT Index gaining 0.7% with 17-of-19 property sectors in positive territory while the Mortgage REIT Index pulled back 1.4%.

All eyes were on Fed Chair Powell after inflation data this week showed the fastest rise in consumer and producer prices in decades. The 10-Year Treasury Yield - along with shorter-term interest rates - retreated after Powell commented that "While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.” Five of the eleven GICS equity sectors finished higher on the day, led to the upside by the Consumer Staples (XLP) and Real Estate (XLRE) sectors while Homebuilder and the broader Hoya Captial Housing Index gained following data showing a strong rebound in mortgage demand last week.

Inflation Stays Red Hot. The BLS reported this morning that the Producer Price Index surged 7.3% for the 12 months ending in June, the fastest increase since the agency began tracking the data in 2010 and faster than the expected increase of 6.8%. Core PPI - which excludes foods, energy and trade services rose at a 5.6% annual rate - also the highest increase on record. This hotter-than-expected producer price data comes a day after the BLS reported that consumer prices rose at the fastest annual rate in decades with the Core PPI Index increasing 4.5% - the highest since 1991.

Commercial Equity REITs

Data Center: Digital Realty (DLR) and Brookfield Infrastructure Partners (BIP) announced an agreement to establish a 50/50 joint venture focused on the development, ownership, and operation of institutional quality data centers in India. The joint venture - which is expected to close in the second half of this year - will operate under the brand name BAM Digital Realty and is positioned to enable the expansion of PlatformDIGITAL, Digital Realty's premier global data center platform in India. Data Center REITs - in synchrony with the broader technology sector - have underperformed their more cyclical and value-oriented counterparts since late 2020 amid an ongoing "Reopening Rotation" and as new supply has pressured pricing power.

Office: Boston Properties (BXP), the Canada Pension Plan Investment Board, and Singapore's GIC announced a co-investment program that will acquire office properties in BXP's core markets of Boston, LA, NYC, San Francisco, DC, and Seattle. BXP and CPP Investments will each allocate $250M and GIC will put in $500. BXP commented, "with these capital commitments, BXP expects to be able to accelerate the pace at which it can pursue acquisition opportunities and extend its investment capacity." While many other COVID-sensitive sectors are seeing a bounce-back in activity this year, office leasing volumes remain depressed while deals that are getting done are being signed at leasing spreads that imply a 10-20% decline in market rents relative to pre-COVID levels.

Hotel: CorePoint Lodging (CPLG) jumped more than 20% today after announcing that it sold 25 non-core hotels in Q2, for a combined gross sales price of ~$143M during the quarter, resulting in 175 hotels owned as of June 30, 2021. An additional 36 hotels are under contract and are expected to generate ~$220M of gross proceeds. Additionally, CPLG announced that its occupancy rate improved to 66% in June, up from 62% in May and June, respectively, and up from 53% in Q1.

Industrial: Yesterday we published Industrial REITs: Who Doesn't Love Logistics? The red-hot industrial property market - the physical "hub" of e-commerce - has shown few signs of cooling down through mid-2021 as businesses scramble to build out supply chain resiliency. Industrial REITs - which recorded the strongest earnings and dividend growth of any real estate sector in 2020 - continue to thrive amid this insatiable demand for logistics space. Brokerage firm CBRE (CBRE) reported that industrial vacancy rates dipped to record-lows last quarter - the 44th consecutive quarter of positive net absorption - driving a nearly double-digit surge in rents. Sharing similar compelling tailwinds as the U.S. housing industry - structurally constrained supply and robust secular demand - we expect that investors willing to "pay up for quality" won't be disappointed.

Mortgage REITs

SPAC Mania continued today as Sachem Capital (SACH) announced that it will launch a SPAC (Special Purpose Acquisition Vehicle), seeking to acquire "businesses within the real estate sector, including real estate finance and real property ownership and management." SAC will offer up to 5,750,000 units (including 750,000 units covered by the underwriter’s overallotment option) at a price of $10.00 per unit, or $50 million in the aggregate ($57.5 million if the underwriter’s overallotment option is exercised in full.) Each unit will include one share of SAC Class A common stock and one-half of a redeemable warrant. SAC is expected to apply to list the units on The Nasdaq Stock Market under the symbol “SCEMU”.

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.3% today and are now off by 5.1% this week. Commercial mREITs slipped 1.3% today and are now lower by 2.1% this week. Redwood Trust (RWT) was lower by about 2% after providing a business update in which it noted that it originated $527M of business purpose loans in Q2, with a funding mix of ~60% single-family rental loans and 40% bridge loans and locked $3.9B of residential loans with 110+ discrete sellers. It also noted that it funded two transactions through the RWT Horizon initiative, including investments in Liquid Mortgage and a tech-enabled residential construction management platform.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.06% today, on average, but underperformed their respective common stock issues by an average of 0.24%. So far in 2021, REIT Preferred stocks are higher by 9.36% on a price return basis. The average REIT preferred pays a current yield of 5.95% and trades at a slight premium to par value. Sunstone Hotel (SHO) announced that it priced its 5.70% Series I Cumulative Redeemable Preferred Stock for gross proceeds of $100M, using the proceeds to redeem all of its 6.450% Series F Cumulative Redeemable Preferred (SHO.PF) on August 12.

Economic Data This Week

We'll see a jam-packed slate of economic data and the start of the second-quarter earnings season in the week ahead, headlined by inflation and retail sales data. On Tuesday and Wednesday, respectively, we'll see Consumer Price Index ("CPI") and Producer Price Index ("PPI") data for June. The BLS reported last month that consumer and producer prices each recorded the largest annual increases in more than a decade. On Friday, we'll see Retail Sales data for June which is expected to show a continued cool down from the stimulus-fueled record-highs set in April. We'll also be watching Jobless Claims data on Thursday and Consumer Sentiment data on Friday.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

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.

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