• Alex Pettee, CFA

Infrastructure Deal • Reflation Trade • REIT Earnings

Summary

  • U.S. equity markets were mixed Tuesday after the Senate advanced a $550 billion infrastructure plan as investors rotated back into "reopening sensitive" sectors ahead of CPI inflation data tomorrow morning.

  • Reversing the patterns and performance on Monday, the S&P 500 rose by 0.1% today while the Mid-Cap 400 gained 0.3% and the Small-Cap 600 rose 0.9%. The Nasdaq slipped 0.6%.

  • Real estate equities were mostly lower today as the Equity REIT Index declined by 1.0% today with 15 of 18 property sectors in negative territory while Mortgage REITs gained 0.8%.

  • Preferred Apartment (APTS) was among the leaders after the diversified REIT raised its full-year outlook on the strength of its Sunbelt multifamily portfolio as new lease rates in July soared 21.3%.

  • DigitalBridge (DBRG) announced that it will acquire a controlling stake in Vertical Bridge, which owns a portfolio of roughly 8k cell towers and a total of 300k communications sites.

Real Estate Daily Recap

U.S. equity markets were mixed Tuesday after the Senate advanced a $550 billion infrastructure plan as investors rotated back into "reopening sensitive" sectors ahead of CPI inflation data tomorrow morning. Reversing the patterns and performance on Monday, the S&P 500 finished higher by 0.1% today while the Mid-Cap 400 gained 0.3% and the Small-Cap 600 gained 0.9%. The tech-heavy Nasdaq 100 slipped 0.6%. Real estate equities were mostly lower today as the Equity REIT Index declined by 1.0% today with 15 of 18 property sectors in negative territory while Mortgage REITs gained 0.8%.

Legislators continue to walk a political tightrope as the proposed $550B in additional fiscal expansion - albeit a trimmed down version of earlier proposals for as much as $3.5 trillion in additional government spending - was advanced despite record-high levels of consumer and producer inflation and waning public support for additional fiscal expansion. The 10-Year Treasury Yield rose another 3 basis points to 1.34% today while eight of the eleven GICS equity sectors were higher, led to the upside by the reopening-sensitive sectors including Energy (XLE), Materials (XLB), and Industrials (XLB). Homebuilders and the broader Hoya Capital Housing Index bounced back today amid further evidence and commentary that builders continue to sell homes as quickly as they can be built.

Real Estate Earnings Updates

Data Center: Today, we published Go Big or Go Home where we discussed recent M&A developments in the data center sector. As predicted early this year, we've seen a boom in data center M&A and IPO activity. Blackstone will take QTS Realty (QTS) private, but several new REIT players have recently emerged. Cyxtera (CYXT) completed its SPAC listing last month, while Switch (SWCH) now appears poised to convert to a REIT. Meanwhile, Colony Capital completed its "digital transformation" and rebranded as DigitalBridge (DBRG). On cue, DBRG was among the leaders today after it announced that it will acquire a controlling stake in Vertical Bridge, which owns a portfolio of roughly 8k cell towers and a total of 300k communications sites.

Apartment: Preferred Apartment (APTS) was among the leaders after the diversified REIT owning apartments, shopping centers, and office properties reported strong Q2 performance and raised its full-year outlook on the strength of its Sunbelt multifamily portfolio. Echoing other apartment REITs, APTS noted that rents are soaring across its markets with new lease rates in July climbing 21.3% while renewals increased 7.5%. APTS now sees multifamily same-store NOI growth of 6.0% for the full year - a solid 350 bps boost from its prior guidance. Rent collection for its shopping center portfolio, meanwhile, increased to 99%, up from a low of 92% in Q2 of 2020.

Mall: Washington Prime (WPG) plunged 15% after reporting Q2 results despite reporting signs of stabilization in its troubled mall portfolio, noting that its occupancy rate improved 30 bps from last quarter while its same-store NOI jumped by 52.3%. WPG provided limited detail on the status of its Chapter 11 restructuring which it entered in early June - the third mall REIT that has entered bankruptcy over the past two years. WPG did it provide 2021 guidance, and nor will it host an earnings conference call this quarter. Bond investors still have confidence in sector stalwart Simon Property (SPG), however, which launched a bond offering of $1.3B in senior notes with an average coupon of 1.865% and maturity of 8.2 years.

Last Friday, we published our Real Estate Earnings Recap. With just a handful of REITs left to report results this week, results were significantly better-than-expected with roughly 90% of equity REITs beating consensus FFO estimates while more than 75% of the REITs that provide forward guidance boosted their full-year outlook. Continuing a dramatic rebound, self-storage REITs led the charge in Q2 while residential REITs reported surging rents across the nation and across every market segment. Shopping center REITs also reported their most impressive quarter in a decade.

Mortgage REITs

Residential mREITs finished higher by 0.7% while commercial mREITs were lower by 0.5%. Granite Point Mortgage (GPMT) - which has been one of the best-performing mREITs this year - slipped 7% after reporting mixed earnings results, noting that its Book Value Per Share ("BVPS") was flat in Q2. Cherry Hill Mortgage (CHMI) was lower by 1% after reporting an 11% decline in its BVPS in Q2 while Lument Financial (LFT) finished off by 3% after reporting that its BVPS declined 3.7% in Q2. Home construction lender Broadmark Realty (BRMK) finished lower by 2% as well despite reporting its largest quarterly origination volume since going public in 2019.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.41% today, on average, and underperformed their respective common stock issues by an average of 0.50%. Over in the bond markets, ACRES Commercial (ACR) priced $150M of 5.75% Senior Unsecured Notes due 2026 which it will use to redeem its outstanding 12.00% Senior Unsecured Notes due 2027. Elsewhere, WP Carey (WPC) commenced a secondary common stock offering of 4.5M shares to fund future investments and repay its 1.8B revolving credit facility.

Economic Data This Week

Inflation data highlights this week's economic calendar, beginning on Wednesday with the Consumer Price Index, which is expected to show that prices rose at a 5.3% year-over-year rate in July, a slight deceleration from last month when core consumer prices rose at the fastest rate since 1992. On Thursday, we'll see the Producer Price Index which is expected to show a 7.4% year-over-year rate in July, which would be the highest on record. We'll then get our first look at Consumer Sentiment data for early August, which has waned in recent months amid consumer concern over inflation.

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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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