• Alex Pettee, CFA

Inflation Stays Hot • Rough Week For REITs

Summary

  • U.S. equity markets declined again Friday - posting their biggest weekly declines since mid-June - after Producer Price data showed that surging inflation may be less "transitory" than investors anticipated.

  • Declining for the fifth-straight session, the S&P 500 finished lower by another 0.8% today while the Mid-Cap 400 slipped 1.0% and Small-Cap 600 declined 1.1%.

  • Real estate equities continued their rough week as the Equity REIT Index extended its weekly declines to 4%, slipping another 1.5% today with all 19 property sectors in negative territory.

  • Moderating inflation? Not so fast. Despite signs of apparent softness across most economic data points over the last month, producer prices surged by the fastest pace on record in August.

  • Small-cap shopping center REIT Cedar Realty Trust (CDR) soared more than 10% today after it announced that it is exploring a potential sale, citing a "profound disconnect" between its share price and underlying value.

Real Estate Daily Recap

U.S. equity markets declined again Friday - posting their biggest weekly declines since mid-June - after Producer Price data showed that surging inflation may be less "transitory" than investors anticipated. Declining for the fifth-straight session, the S&P 500 finished lower by another 0.8% today while the Mid-Cap 400 slipped 1.0% and Small-Cap 600 declined 1.1%. Real estate equities continued their rough week as the Equity REIT Index extended its weekly declines to 4%, slipping another 1.5% today with all 19 property sectors in negative territory while Mortgage REITs declined 1.3% today and nearly 3% on the week.

All eleven GICS equity sectors were lower on the day - and on the week - in another chopping trading session on Friday, dragged on the downside by the Utilities (XLU) and Real Estate (XLRE) sectors. Despite the sell-off, the 10-Year Treasury Yield jumped 4 basis points on the day following the hotter-than-expected PPI report this morning. 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.

Moderating inflation? Not so fast. Despite signs of apparent softness across most economic data points over the last month, the BLS reported this morning that the Producer Price Index surged 8.3% for the 12 months ending in August, the fastest increase since the agency began tracking the data in 2010 and faster than the expected increase of 8.2%. Core PPI - which excludes foods, energy, and trade services rose at a 6.7% annual rate - also the highest increase on record. The data comes after a handful of industrial goods producers warned about persistent supply chain shortages this week and JOLTs data showing that firms are having difficulty finding employees.

Equity REITs

Shopping Centers: Cedar Realty Trust (CDR) soared more than 10% today after it announced that it is exploring a potential sale. Citing a "profound disconnect between Cedar's share price and the underlying value of our real estate" the small-cap shopping center REIT has "initiated a dual-track process to review the Company's strategic alternatives in order to maximize shareholder value." As part of the process, Cedar is "exploring, among other alternatives, a potential sale or merger involving the entire Company, and alternatively the potential sale of its core grocery-anchored shopping center portfolio and its mixed-use redevelopment projects." Consistent with the broader shopping center sector, CDR has seen a notable improvement in fundamentals, reporting same-store NOI growth of 8.2% last quarter.

Data Center: Landmark Infrastructure (LMRK) traded flat today after it disclosed that it rejected a request by LMRK's conflicts committee to engage with Melody Investment Advisors on a revised $22 per common unit offer received on Sept. 3. Digital Colony (DBRG) agreed in May to acquire Landmark Dividend for $13 per common unit and subsequently, on Aug. 23, LMRK agreed to be acquired by its sponsor, Landmark Dividend, for $16.50 per common unit. Explaining the rejection, DBRG noted that the proposal "fails to value Landmark Dividend’s controlling general partner interest and incentive distribution rights." In the final, DBRG noted that if the transaction were not successful, that LMRK to continue to operate as a publicly-traded MLP.

Single-Family Rentals: Yesterday, we published Wall Street Bets On Single-Family Rentals. SFR REITs are one of the great success stories of the Modern REIT Era, becoming a "core" institutional asset class and quieting the critics that questioned their ability to operate efficiently. The combination of historically low housing supply and strong demographic-driven demand - with added pandemic-driven tailwinds - has sent single-family rents soaring at the fastest rate on record. Riding this rental boom, SFR REITs are the single-best performing property sector since the end of 2019, gaining another 40% this year following stellar earnings results and recent updates. The growth trajectory remains promising for SFR REITs as the "institutionalization" of the single-family housing market remains in the early innings.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.9% today to end the week with declines of 2.0%. Commercial mREITs slipped 1.5% today and ended the week lower by 3.5%. A theme through this week in the REIT sector, Blackstone Mortgage Trust (BXMT) and Western Asset Mortgage (WMC) each declined roughly 5% after launching secondary stock offerings. The average residential mortgage REIT now pays a dividend yield of 9.1% while the average commercial mortgage REIT pays a dividend yield of 6.9%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.12% today, on average, but outperformed their respective common stock issues by an average of 1.01%. So far in 2021, REIT Preferred stocks are higher by 11.06% on a price return basis. The average REIT preferred pays a current yield of 5.91% and trades at a slight premium to par value.

Economic Calendar 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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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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