• Alex Pettee, CFA

Moderating Inflation? Not So Fast

Summary

  • U.S. equity markets were mostly-higher Thursday while bond yields climbed to one-month highs following solid employment data and PPI data showing that its too soon to declare victory over inflation.

  • Climbing to fresh all-time highs, the S&P 500 finished higher by 0.3% today while the Mid-Cap 400 finished lower by 0.1% and the Small-Cap 600 retreated 0.5%.

  • Led by residential REITs, real estate equities were among the leaders today as the Equity REIT Index gained 0.3% with 12 of 19 property sectors in positive territory.

  • Moderating inflation? Not so fast. The BLS reported this morning that the Producer Price Index surged 7.8% for the 12 months ending in June, the fastest increase since the agency began tracking the data in 2010.

  • Single-family rental operator Tricon Residential reported strong results and confirmed that rents continue to soar across its Sunbelt markets, recording 20.7% higher rents on new leases in July.

Real Estate Daily Recap

U.S. equity markets were mostly-higher Thursday while bond yields climbed to one-month highs following a solid slate of employment data and PPI data showing that its too soon to declare victory over inflation. Climbing to fresh all-time highs, the S&P 500 finished higher by 0.3% today while the Mid-Cap 400 finished lower by 0.1% and the Small-Cap 600 retreated 0.5%. The tech-heavy Nasdaq 100 gained 0.4%. Real estate equities were among the leaders today as the Equity REIT Index gained 0.3% with 12 of 19 property sectors in positive territory while Mortgage REITs declined 0.1%.

As second quarter corporate earnings season unofficial wraps up this afternoon, hotter-than-expected PPI data and a continued retreat in continuing jobless claims sent the 10-Year Treasury Yield up to 1.37% - the highest close since July 14th. Seven of the eleven GICS equity sectors finished higher on the day, led to the upside by the Healthcare (XLV) and Technology (XLK) sectors. Residential REITs and homebuilding products firms led the Hoya Capital Housing Index today following strong earnings results from single-family rental operator Tricon Residential, which confirmed that rents continue to soar across its Sunbelt markets recording 20.7% higher rents on new leases in July.

Moderating inflation? Not so fast. After early signs in yesterday's CPI report of some potential relief from soaring price levels, the BLS reported this morning that the Producer Price Index surged 7.8% for the 12 months ending in June, the fastest increase since the agency began tracking the data in 2010 and significantly faster than the expected increase of 7.3%. Core PPI - which excludes foods, energy and trade services rose at a 6.2% annual rate - also the highest increase on record. This hotter-than-expected producer price data comes a day after the BLS reported that consumer prices rose at a 5.28% rate in July - the third-highest annual increase since 1991.

Real Estate Earnings Updates

Apartment: Today, we published Rents Are Soaring. After lagging early in the pandemic, Apartment REITs have surged nearly 40% this year as rental operators across the country have been "passed the torch" of the flaming-hot housing market. Apartment rents are rising at the fastest rate on record as the pandemic-driven boom in household formations - including 1.6 million new renters - has clashed with the record-low housing supply. Demographics suggested the 2020s were already poised to see historic housing demand, but the Work From Home era has begun to unleash millions of extra "deferred" formations among adult children. Apartment REITs reported that new lease rates soared 15% in July - the highest on record - as rents are now rising by double-digit rates across half of the major markets.


Mall: Troubled mall REIT CBL Properties (OTCPK:CBLAQ) announced today that the United States Bankruptcy Court for the Southern District of Texas approved its reorganization plan. The plan calls for restructuring the company's balance sheet to provide for the elimination of more than $1.6B of debt and preferred obligations and a significant reduction in interest expense. In exchange for $1.38B in unsecured notes and $133M in principal amount of the secured credit facility, noteholders will get $555M in new senior secured notes, of which up to $100M may be in the form of convertible secured notes, and 89% in common equity of the newly reorganized company. Existing common equity owners are expected to get up to 11% of common equity in the reorganized company.

Data Center: Earlier this week, we published Go Big or Go Home where we discussed recent M&A developments in the data center sector. Cyxtera (CYXT) completed its SPAC listing last month, while Switch (SWCH) now appears poised to convert to a REIT. As predicted early this year, we've seen a boom in data center M&A and IPO activity as Blackstone will take QTS Realty (QTS) private, but several new REIT players have recently emerged. Meanwhile, Colony Capital completed its "digital transformation" and rebranded as DigitalBridge (DBRG). With Digital Realty (DLR) and Equinix (EQIX) sitting on ample dry powder, we suspect the M&A boom is just getting started and see consolidation as a potential catalyst and necessary to regain pricing power from the hyperscale giants including Amazon (AMZN) and Google (GOOGL).

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished flat today, on average, and outperformed their respective common stock issues by an average of 0.23%. Over in the bond market, Ventas (VTR) priced $500M of 2.500% Senior Notes due 2031. Elsewhere, Easterly Government (DEA) launched a secondary offering of 6.3M shares, using the proceeds for acquisition, development, redevelopment or improvement of properties, full or partial repayment of debt and capital expenditures.

Economic Data This Week

The busy week of economic data concludes on Friday with our first look at Consumer Sentiment data for early August, which has waned in recent months amid consumer concern over inflation. 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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