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  • Alex Pettee, CFA

Inflation Week • Geopolitical Tensions • REIT Transition Done

  • U.S. equity markets declined for a fourth-day Monday as heightened geopolitical tensions and downward earnings revisions added to concerns over aggressive Fed-tightening ahead of a critical slate of inflation data.

  • Erasing much of last week's modest gains, the S&P 500 finished lower by 0.8% today while the tech-heavy Nasdaq 100 dipped 1.0% to push its year-to-date declines to nearly 35%.

  • Real estate equities remained under pressure today - particularly technology REITs - with the Equity REIT Index declining another 1.0% today with 15-of-18 property sectors in negative territory.

  • Ahead of a critical slate of inflation data throughout the week, comments from Fed Vice Chair Brainard and Chicago Fed President Evans were viewed as slightly less hawkish than recent commentary with both officials explicitly citing the risk of over-tightening.

  • Veris Residential (VRE) - formerly known as Mack Cali - surged more than 10% today after it announced an agreement to sell Harborside 1, 2, and 3 in Jersey City for $420M as it nears the completion of its transition from an office REIT into a pure-play multifamily REIT.

 

Income Builder Daily Recap

U.S. equity markets declined for a fourth day Monday as heightened geopolitical tensions and downward earnings revisions added to concerns over aggressive Fed tightening ahead of a critical week of inflation data. Erasing much of last week's modest gains, the S&P 500 finished lower by 0.8% today while the tech-heavy Nasdaq 100 dipped 1.0% to push its year-to-date declines to nearly 35%. The more-domestically-focused Mid-Cap 400 and Small-Cap 600 were outperformers today. Real estate equities remained under pressure today - particularly technology REITs - with the Equity REIT Index declining another 1.0% today with 15-of-18 property sectors in negative territory while the Mortgage REIT Index dipped another 3%.

Ahead of a critical slate of inflation data throughout the week, comments from Fed Vice Chair Brainard and Chicago Fed President Evans were viewed as slightly less hawkish than recent commentary with both officials explicitly citing the risk of over-tightening. U.S. bond cash markets were closed today for the Columbus Day holiday, but Treasury futures markets pointed to modestly higher yields upon reopening amid an intensification of aggression between Russia and Ukraine while the US Dollar Index advanced another 0.5% to the cusp of fresh two-decade highs. Crude Oil snapped a five-day advance sparked by last week's OPEC output cuts. Seven of the eleven GICS equity sectors finished lower today with Energy (XLE) and Technology (XLK) stocks dragging on the downside.

Inflation data highlight a busy week of economic data in the coming week ahead of the Fed's November meeting the first week of November. On Thursday, the BLS will report the Consumer Price Index 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 8.1% year-over-year rate but the Core CPI is expected to accelerate slightly to 6.5% as the effects of the delayed recognition of housing inflation from 2021 continue to add upward pressure to the metrics. Consumer gas prices were, on average, 7% lower in September compared to the prior month but have since jumped by 8% from their bottom on September 18th. Earlier in the week on Wednesday, we'll see the Producer Price Index for September which is expected to exhibit similar trends of peaking price pressures. On Friday, we'll see Retail Sales data and get our first look at Michigan Consumer Sentiment for September. 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.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector


Apartment: Veris Residential (VRE) - formerly known as Mack Cali - surged more than 10% today after it announced an agreement to sell Harborside 1, 2, and 3 in Jersey City for an aggregate price of $420M as it nears the completion of its transition from an office REIT into a pure-play multifamily REIT. VRE also announced the closing of its sale of 101 Hudson Street for $346M. Following the close of Harborside 1/2/3 and the stabilization of Haus25, multifamily will represent approximately 98% of Veris' Net Operating Income, up from 39% as of the end of the first quarter of 2021. Since early 2021, Veris has closed on roughly $1.4B in office sales while adding approximately 1,900 units to its residential portfolio, which is now comprised of roughly 7,700 units - primarily in the NYC metro area.

Casino: Gaming & Leisure Properties (GLPI) was roughly flat today after it announced that it agreed to create a new master lease with PENN Entertainment (PENN) for seven of PENN’s current properties to facilitate funding to support PENN's pursuit of relocation and development opportunities at several of the properties included in the new master lease. The new master lease will add Penn's properties in Aurora and Joliet, Illinois; Columbus and Toledo, Ohio; and Henderson, Nevada. In addition, the existing leases for the Hollywood Casino at The Meadows in Pennsylvania and Hollywood Casino Perryville in Maryland will terminate and these properties will be transferred into the new master lease. GLPI has agreed to fund up to $225M for the relocation of PENN’s riverboat casino in Aurora at a 7.75% cap rate and to fund up to $350M for the relocation of the Hollywood Casino Joliet as well as the construction of hotels at Hollywood Casino Columbus and a second hotel tower at M Resort Spa Casino at then current market rates.


Healthcare: Hospital owner Medical Properties Trust (MPW) - which has dipped more than 50% this year and recently come into the cross-hairs of short-selling firms - advanced nearly 3% after its board authorized the repurchase of up to $500M of stock before October 2023. MPW also announced today that it plans to sell its portfolio of 11 hospital properties in Australia operated by Healthscope, which it acquired in 2019 for $840M. MPW dipped sharply last week after one of its smaller tenants, Pipeline Health, filed for Chapter 11 bankruptcy protection on Monday while also announcing plans to sell three Connecticut hospitals to Prospect Medical Holdings for $457M.

Storage: Today we published Self-Storage REITs: Locked-In and Sticky which discussed how storage REITs have defied expectations to the upside as comprehensively as any real estate sector since the start of the pandemic, delivering earnings growth of over 50% since 2019. Incremental storage demand is driven by change - particularly home moving rates and household formations. Surging mortgage rates have had a "lock-in" effect among existing homeowners while also pricing-out new formations. While the rate-driven slowdown in housing market activity is expected to temper incremental storage demand, recent data and interim REIT updates have indicated "sticky" demand trends continued deep into the third quarter. Given the deeply discounted valuations, we like the risk/reward at these levels, given the strong balance sheets, low cap-ex needs, and operational track record.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, the sharp volatility continued for mortgage REITs as residential mREITs slid another 4% while commercial mREITs dipped 2%. Sachem Capital (SACH) was the lone mREIT higher on the day after announcing a stock buyback program last week and announcing a roughly $1.1M acquisition of real estate firm Urbane New Haven funded with 300k common shares. Elsewhere, Dynex Capital (DX) declined 3% despite holding its monthly dividend steady at $0.13/share. Laggards today included AG Mortgage (MITT) and Western Asset Mortgage (WMC), which each dipped more than 7.5%

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.

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