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  • Alex Pettee, CFA

Inflation Week • Deeper Inversion • REIT Earnings

  • U.S. equity markets finished mostly-higher Monday ahead of a critical week of inflation data which kicked-off today with encouraging data showing a sharp decline in consumer inflation expectations in July.

  • Entering the session on a three-week winning streak, the S&P 500 retreated 0.1% today but the Mid-Cap 400 and Small-Cap 600 each posted gains of over 0.5%.

  • Real estate equities were among the best-performers sectors today as investors digested an upbeat slate of REIT earnings results over the last three weeks. The Equity REIT Index gained 0.9%.

  • A critical week of inflation data started with some good news today as a New York Federal Reserve survey showed a sharp decline in consumer inflation expectations in July as recession concerns fueled significant declines in expectations of food prices, energy, and home prices over the survey horizon.

  • Digital Realty (DLR) was among the better performers today after it announced a deal to sell a $205M data center at a 5.2% cap rate and use the capital to pay down debt. We'll hear results this afternoon from Tanger Outlets (SKT) and National Health Investors (NHI), among others, as REIT earnings season concludes.

 

Real Estate Daily Recap

U.S. equity markets finished mostly-higher Monday ahead of a critical week of inflation data which kicked off today with encouraging data showing a sharp decline in consumer inflation expectations in July. Entering the session on a three-week winning streak, the S&P 500 retreated 0.1% today but the Mid-Cap 400 and Small-Cap 600 each posted gains of over 0.5%. Real estate equities were among the best-performers sectors today as investors digested an upbeat slate of REIT earnings results over the last three weeks. The Equity REIT Index finished higher by 0.9% today with 17-of-18 property sectors in positive territory while the Mortgage REIT Index advanced 1.5%.

Bonds rebounded today following a sharp sell-off on Friday following the stronger-than-expected nonfarm payrolls report which cast doubt on the likelihood of a "Fed pivot" towards less aggressive tightening. The 10-Year Treasury Yield retraced about half of its gains from last week, dipping 7 basis points today to close at 2.77% while the 2-Year Treasury Yield closed at 3.22% - the deepest inversion on the 10-2 curve since 1982. Seven of the eleven GICS equity sectors finished higher today with notable outperformance from homebuilders and the broader Hoya Capital Housing Index as a recent dip in mortgage rates appears to be pulling some buyers back into the market with Redfin's (RDFN) Homebuyer Demand Index posting strong gains last week. On the downside today, the Technology (XLK) sector was dragged down by disappointing results from chip manufacturer NVIDIA (NVDA).


A critical week of inflation data started with some good news today as a New York Federal Reserve survey showed a sharp decline in consumer inflation expectations in July as recession concerns fueled significant declines in expectations of food prices, energy, and home prices over the survey horizon. Notably, consumers see the three-year inflation rate at 3.2% - down from 3.6% last month - and only marginally above the 10-year average inflation expectation of around 3.0%. On Friday, we'll get our first look at Michigan Consumer Sentiment for August which includes a similar inflation expectations survey. Last month, sentiment fell to the lowest level in more than 10 years as persistent inflation and worries over economic growth have weighed on confidence. The Fed is particularly interested in the 5-Year Inflation Expectations survey, looking for signs of a potential "wage-price inflation spiral" through elevated consumer wage expectations.


The major inflation reports on the week include the Consumer Price Index on Wednesday which investors - and the Fed - are hoping to show that the fastest pace of year-over-year increases is finally behind us. The headline CPI is expected to moderate to an 8.7% annual rate from the four-decade-high set in June as the effects of declining gasoline prices begin to filter into the data. Gas prices have declined about 20% since their peak on June 13th at $5.01 per gallon. The following day we'll see the Producer Price Index for July which is expected to exhibit similar trends of peaking price pressures.


Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Over the weekend, we published our REIT Earnings Recap on the Income Builder Marketplace. The U.S. REIT industry - which remains relatively "early" in its post-pandemic recovery - exhibited few signs of softness in the second quarter even as the U.S. entered a technical recession. Earnings results from residential, self-storage, and shopping center REITs were most impressive, followed closely behind by industrial and net lease REITs. Office REITs were the lone weak spot among major sectors. Nearly two-thirds of REITs raised their full-year guidance. Strong results from REITs come amid an otherwise disappointing earnings season for the broader equity market in which less than 50% of S&P 500 companies raised their 2022 earnings outlook. We'll hear from the final handful of REITs over the next few days including reports this afternoon from BRT Apartments (BRT), Indus Realty (INDT), National Health Investors (NHI), and Tanger Outlets (SKT).

Data Center: Digital Realty (DLR) was among the better-performers today after it announced a deal to sell a $205M data center. The 370K sq ft facility - which was initially acquired by DLR in 2004 - will be sold at a 5.2% cap rate in a deal expected to close later this quarter and DLR plans to use the proceeds to pay down debt. In our Earnings Recap, we discussed the relatively solid results from data center REITs in Q2 which exhibited encouraging signs of strengthening pricing power. Interconnection-focused assets - a focus of Equinix (EQIX) - continue to deliver the strongest rent growth as these facilities are more immune to the persistent competition from hyperscale cloud companies - Amazon (AMZN), Google (GOOG), and Microsoft (MSFT) - with nearly limitless resources. Notably, Digital Realty reported its strongest quarter of rent growth since 3Q19 in the second quarter, driven by a 17% jump in renewal pricing on interconnection leases, offset by 1.1% growth on large enterprise leases.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs rebounded today following last week's declines as residential mREITs advanced 1.7% while commercial mREITs gained 1.5%. 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. Ahead of the final stretch of mREIT earnings reports this week, residential REITs have reported average BVPS declines of about 10% in Q2 while commercial mREITs have reported a 0.4% increase, on average. Over the next 24 hours, we'll hear results from Broadmark (BRMK), Granite Point (GPMT), Lument Finance (LFT), and AFC Gamma (AFCG).

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished higher by 0.24% 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 6.89%.

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.


The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.


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