• Alex Pettee, CFA

Merger Monday • Office Spin-Off • Week Ahead

Updated: Nov 16

Summary

  • U.S. equity markets were mixed Monday amid a busy slate of M&A news while investors remained focused on the outlook for inflation and the path of Federal Reserve policy.

  • Following slim losses last week that snapped a five-week winning streak, the S&P 500 finished fractionally lower today while the Mid-Cap 400 advanced 0.2% and the Small-Cap 600 slipped 0.3%.

  • Data center REIT CoreSite (COR) rallied 4% after finalizing a deal to be acquired by cell tower REIT American Tower (AMT) for $170 in cash per CoreSite share - amounting to $10.1B.

  • Separately, CyrusOne (CONE) rallied nearly 5% after it finalized a deal to be taken private by KKR (KKR) for $90.50/share in cash - representing a total deal value of roughly $15B including debt.

  • As part of its completed merger with Vereit, net lease stalwart Realty Income (O) announced it has completed the spin-off of its office assets into a new independent, publicly traded REIT - Orion Office REIT (ONL).

Income Builder Daily Recap

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U.S. equity markets were mixed Monday amid a busy slate of M&A news while investors remained focused on the outlook for inflation and the path of Federal Reserve policy ahead of key economic data reports later this week. Following slim losses last week that snapped a five-week winning streak, the S&P 500 finished fractionally lower today while the Mid-Cap 400 advanced 0.2% and the Small-Cap 600 finished lower by 0.3%. Real estate equities were among the leaders today as the Equity REIT Index advanced 0.5% today with 17-of-19 property sectors in positive territory but Mortgage REITs slipped 0.4%.

We have another busy week of economic and housing data in the week ahead, kicking off on Tuesday with Retail Sales data for October, which is expected to show a modest increase in spending despite the slump in consumer sentiment. Later on Tuesday, we'll see NAHB Homebuilder Sentiment data for November which is expected to stay steady with last month. On Wednesday, we'll see Housing Starts and Building Permits data for October which is expected to show that construction activity accelerated modestly last month as supply chain constraints slowly ease at the margins.


Equity REIT Daily Recap

Data Center: Earlier this year in Go Big or Go Home, we identified three smaller data center REIT as prime acquisition targets. Several months later - all three REITs have indeed been taken out. CoreSite (COR) rallied 4% after finalizing a deal to be acquired by cell tower REIT American Tower (AMT) for $170 in cash per CoreSite share - amounting to $10.1B including debt. As we discussed on the Income Builder chat this weekend, while COR's high-value interconnection-focused data centers are clearly synergistic with AMT's core tower business, it is nonetheless a departure from the tried-and-true business model that has been so successful for AMT over the past decade.

Separately, CyrusOne (CONE) rallied nearly 5% after it finalized a deal to be take private by KKR (KKR) and Global Infrastructure Partners for $90.50/share in cash - representing a total deal value of roughly $15B including debt. As we'll discuss in an exclusive report on Income Builder this evening, we’re surprised we haven't seen Digital Realty (DLR) or Equinix (EQIX) be more aggressive with COR, QTS, and/or CONE when both major data center REITs are "overdue" for a major M&A move based on their historical cadence. Our “long-shot” call earlier this year was that we’d see a mega-merger between DLR and EQIX – and certainly, the lack of aggressiveness this year on pursuing the smaller data center REITs would be consistent with a theory that something else is in the works that would preclude these pursuits.

Apartment: Today we published Apartment REITs: Shelter From Inflation. Renters across the nation should prepare for a rude surprise. Residential rents continue to soar at the fastest-pace on record with double-digit percentage increases on both new leases and renewals. Riding this rental growth surge, Apartment REITs - which lagged early in the pandemic- have soared more than 50% this year with widespread strength across both Sunbelt-focused and Coastal-focused REITs. Apartment REITs have exhibited restraint in rental rate increases on existing tenants - sometimes rent-control-related - as the gap between new leases and renewals has never been wider - implying substantial embedded NOI growth ahead. We discussed our picks in the apartment REIT sector in our exclusive Income Builder report.

Office: Also today, as part of its completed merger with Ventas, net lease stalwart Realty Income (O) announced it has completed the spin-off of its office assets into a new independent, publicly traded REIT - Orion Office REIT (ONL) - which owns a portfolio of 92 properties with approximately 72% of ABR from investment grade credit rated tenants. Under the terms of the spin-off, Realty Income stockholders received one share of Orion common stock for every ten shares of Realty Income common stock held as of the record date of November 2, 2021.


Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential mREITs slipped 0.6% today while commercial mREITs ended lower by 0.3%. Today, Ares Commercial (ACRE) announced an expended loan and credit facility, reducing it interest rate from LIBOR plus 5.75% to an initial fixed rate of 4.50%. Broadmark Realty (BRMK) announced that it closed its $100m private placement of 5.0% senior unsecured notes due 2026. Ready Capital (RC) priced a $927m commercial mortgage collateralized loan obligation transaction which is assigned a "AAA" rating by Moody's. The average residential mortgage REIT now pays a dividend yield of 8.96% while the average commercial mortgage REIT pays a dividend yield of 7.39%.


We're excited to announce the launch of our new investment research service here on Seeking Alpha - Hoya Capital Income Builder. We've put together a great team of contributors from across the REIT, dividend, and ETF industry, so whether your focus is High Yield or Dividend Growth, we’ve got you covered with high-quality, actionable investment research and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%. And of course, subscribers receive complete access to our investment research - including reports that are never published elsewhere - from Hoya Capital and our team of contributors.

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.

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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