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  • Alex Pettee, CFA

Powell Eyed • Home Prices Dip • REIT Capital Raising

  • U.S. equity markets finished mostly-lower Tuesday ahead of a closely-watched speech from Fed Chair Powell on Wednesday - the last major scheduled Fed speech before the December rate decision.

  • Following declines of 1.5% on Monday, the S&P 500 slipped another 0.2% today, but the Mid-Cap 400 and Small-Cap 600 each finished modestly higher. The tech-heavy Nasdaq 100 dipped 0.8%.

  • Real estate equities were the best-performing equity group today with the Equity REIT Index advancing 1.7% with all 18 property sectors in positive territory. Mortgage REITs advanced 0.7%.

  • The Case-Shiller US National Home Price Index - which lags current market conditions by about 3 months - declined 1.0% in September from the prior month - the third-straight month-over-month decline and the largest single-month decline since November 2011.

  • Apartment REIT AvalonBay (AVB) priced $350M of 10-year notes due 2033 at a 5.00% fixed interest rate. By comparison, AVB issued $700M of 10-year notes last September at a 2.05% interest rate.

 

Income Builder Daily Recap

U.S. equity markets finished mostly-lower Tuesday ahead of a closely-watched speech from Fed Chair Powell on Wednesday - the last major scheduled Fed speech before the December rate decision. Following declines of 1.5% on Monday, the S&P 500 slipped another 0.2% today, but the Mid-Cap 400 and Small-Cap 600 each finished modestly higher. The tech-heavy Nasdaq 100 dipped 0.8%. The 10-Year Treasury Yield climbed 5 basis points to 3.75%. Real estate equities were the best-performing equity group today with the Equity REIT Index advancing 1.7% with all 18 property sectors in positive territory while the Mortgage REIT Index advanced 0.6%. Homebuilders advanced 1.2% despite data showing another monthly decline in home prices.

The historically-swift surge in mortgage rates this year continues to pour icy-cold water over the previously-red-hot U.S. housing sector. The Case-Shiller US National Home Price Index - which lags current market conditions by about 3 months - declined 1.0% in September from the prior month - the third-straight month-over-month decline and the largest single-month decline since November 2011. On a year-over-year basis, home values were still 13.0% higher than September 2021. Low inventory levels should help to contain the potential downside in home values - particularly if mortgage rates moderate into year-end or if employment markets remain healthy - but an increasing number of housing markets in the U.S. are now seeing home price declines for the first time in a decade. Data from Zillow (Z), meanwhile, showed that roughly half of the Top 60 markets recorded negative month-over-month growth in October with particularly sharp slowdowns in West Coast markets.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Mall: Today we published Mall REITs: The Bleeding Has Stopped. Mall REITs - which endured a dismal stretch of underperformance from 2015-2020 - enter the critical holiday season on surprisingly stable footing as resilient consumer spending has offset broader macro-headwinds. The momentum from the stimulus-fueled ‘spending spree’ appears likely to carry retailers through the holiday season. Store openings continue to outpace store closings in 2022 by the widest-margin in decades. Following nearly three years of rental rate and occupancy declines, the supply-demand dynamic has recently favored retail landlords, rewarding mall REITs with some long-elusive pricing power. The momentum from the stimulus-fueled ‘spending spree’ appears likely to be enough to carry retailers through the holiday season – even without the cash in the pocketbooks – but the longer-term sustainability of this momentum is in question as credit card balances have swelled to pre-stimulus levels while the personal savings rate has dipped to nearly 15-year lows - suggesting that a recession could be particularly painful.


Apartment: A pair of apartment REITs tapped the debt markets this week. AvalonBay (AVB) priced $350M of 10-year notes due 2033 at a 5.00% fixed interest rate. By comparison, AVB issued $700M of 10-year notes last September at a 2.05% interest rate. Elsewhere, Centerspace (CSR) closed on a $100M one-year floating-rate term loan priced at SOFR+ 1.20%-1.75% based upon its leverage ratio. As noted in our updated State of the REIT Nation report, REITs have been able to lean more heavily into shorter-term credit facilities for funding needs rather than tapping longer-term bond markets, hoping to "wait out" the spike in interest rates this year. REITs entered this period of volatility with a "war chest" relative to their position in 2008 as REITs raised more capital from 2019-2021 than in any prior three-year period on record with most REITs able to lock in low-interest rates on long-term debt while still maintaining a relatively "equity-rich" capital stack.

Industrial: Yesterday, INDUS Realty (INDT) rallied after Centerbridge Partners and GIC Real Estate proposed to acquire the industrial REIT for $65.00 per share, a 13% premium to INDUS stock's closing price of $57.28 on Friday. INDUS - previously known as Griffin Industrial Realty before its REIT conversion back in 2021 - owns 42 industrial/logistics buildings aggregating 6.1 million square feet in Connecticut, Pennsylvania, North Carolina, South Carolina, and Florida. INDUS' board said it will review the proposal "to determine the best path forward" that "maximized value for all of the company's shareholders." Centerbridge currently owns approximately 15% of the Company’s common stock. For GIC, the deal would be its second major acquisition of the past quarter following its $14B takeover of net lease REIT Store Capital (STOR) back in September.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were also broadly lower with residential mREITs slipping 1.5% while commercial mREITs declined 1.7%. On another quiet day of newsflow in the mREIT space, upside leaders included Western Asset (WMC) and AG Mortgage (MITT) while Angel Oak (AOMR) and NexPoint Real Estate (NREF) lagged. After the close yesterday, iStar (STAR) announced the finalized amounts of the special dividend related to its acquisition of Safehold (SAFE) payable to SAFE's shareholders valued at approximately $190 million.

Last week, we published Mortgage REITs: High Yields Are Fine, For Now. Mortgage REITs - which were left for dead amid a historically brutal year across fixed-income markets - have rebounded in recent weeks as earnings results were not as catastrophic as feared. Mortgage REITs are now outperforming Equity REITs for the year, and we continue to see value in a modest allocation towards higher-quality mREITs in a balanced income-focused real estate portfolio. Despite paying average dividend yields in the mid-teens, the majority of mREITs were able to cover their dividends as improved earnings power from wider investment spreads offset book value declines, but we flagged a handful of mREITs with payout ratios above 100% of EPS.

Economic Data This Week

Employment data and inflation data highlight another critical week of economic data in the week ahead headlined by JOLTS and ADP Payrolls data on Wednesday, Jobless Claims data on Thursday and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of roughly 200k in November - which would be the smallest gain since December 2020 - and for the unemployment rate to stay steady at 3.7%. 'Good news is bad news' will likely be the theme of these reports as investors and the Fed await the long-awaited cooldown in labor markets which has yet to fully materialize. On Thursday, we'll also see the PCE Price Index - the Fed's preferred gauge of inflation - which is expected to show similar trends of moderating price pressures as seen in the CPI and PPI reports in the prior week.

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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