• Alex Pettee, CFA

Reflation Trade • Yields Jump • Week Ahead

Summary

  • U.S. equity markets were mixed Monday - continuing last week's "reflation trade" patterns - as bond yields and commodity prices jumped while yield-sensitive large-cap technology stocks lagged.

  • Following gains of 0.6% last week, the S&P 500 retreated by 0.3% today but the Mid-Cap 400 gained 0.9% while the Small-Cap 600 jumped 1.9%. The tech-heavy Nasdaq 100 declined nearly 1%.

  • Real estate equities - particularly the large-cap technology REITs - were under pressure today as the Equity REIT Index finished lower by 1.3% with 13-of-19 property sectors in negative territory.

  • Asset manager Blackstone (BX) announced it will sell The Cosmopolitan Casino and Hotel in Las Vegas in a $5.65B deal to a group that includes its affiliated non-traded REIT, which BX says is it's most profitable single asset sale ever.

  • The busy week of economic data includes Case-Shiller Home Price Index on Tuesday, Pending Home Sales data on Wednesday, and PCE Price Index data on Friday, which is expected to show another month of above-4% annual inflation in August.

Real Estate Daily Recap

U.S. equity markets were mixed Monday - continuing last week's "reflation trade" patterns - as bond yields and commodity prices jumped while yield-sensitive large-cap technology stocks lagged. Following gains of 0.6% last week, the S&P 500 retreated by 0.3% today but the Mid-Cap 400 gained 0.9% while the Small-Cap 600 jumped 1.9%. The tech-heavy Nasdaq 100 declined nearly 1%. Real estate equities - particularly the large-cap technology REITs - were under pressure today as the Equity REIT Index finished lower by 1.3% with 13-of-19 property sectors in negative territory while Mortgage REITs advanced 0.9%.


All eyes were on the bond and commodities market today as the 10-Year Treasury Yield jumped above 1.50% for the first time since June as oil prices climbed to towards their highest level in three years, nudged higher today by solid Durable Goods Orders data. Six of the eleven GICS equity sectors were lower today, dragged on the downside by the yield-sensitive equity segments of the market including Utilities (XLU) and Real Estate (XLRE). Homebuilders and the broader Hoya Capital Housing Index bounced back today following a strong slate of housing data last week and ahead of home price data on Tuesday morning.

On that point, the busy week of data kicks off on Tuesday the Case-Shiller Home Price Index, which is expected to show that home values soared 20% in July from the prior year symptomatic of the intense and lingering housing shortage. On Wednesday, we'll see Pending Home Sales data for August, which is expected to show a modest increase in purchasing activity. We'll see inflation data on Friday with the PCE Price Index - the Fed's "preferred" measure of consumer inflation - which is expected to show another month of above-4% annual inflation in August.

Equity REITs

Casino: Blackstone (BX) announced it will sell The Cosmopolitan Casino and Hotel in Las Vegas in a $5.65B deal, which BX says is it's most profitable single asset sale ever. MGM Resorts International (MGM) will acquire the hotel and casino operations for $1.625 billion while BX will sell the real estate assets to a partnership which includes a stake for its affiliated non-traded REIT, Blackstone Real Estate Income Trust. The deal is one of several major casino real estate deals and follows the announced merger between casino REITs VICI Properties (VICI) and MGM Growth (MGP) back in August, which will form the largest casino owner in the country which we discussed in our recent report: The New Kings of Vegas.

Office: This afternoon, we will publish The New Normal which will analyze recent trends in the office sector. While we see Work-From-Home headwinds persisting, we've become modestly more bullish on office REITs over the past several months on better-than-expected Q2 earnings results and strong private-market pricing. Led by strong results from Sunbelt-focused REITs including Cousins (CUZ) and Highwoods (HIW), rents and leasing volumes exhibited a positive inflection in Q2. A "new normal" on several levels, office REITs - which traded at premium multiples throughout the post-GFC period - have become relative "value plays" in the post-pandemic period, trading at similar valuations as retail REITs with several now trading at attractive levels.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mostly higher today as residential mREITs gained 0.8% following gains of 0.8% last week. Commercial mREITs climbed 0.6% today after ending last week with 0.1% gains. On a slow day of newsflow, Hannon Armstrong (HASI) was among the outperformers after it established a $100M "green" debt offering. Proceeds from the CarbonCount Green Commercial Paper Notes will be used to acquire or refinance, in whole or in part, Eligible Green Projects, which include Behind-the-Meter, Grid-Connected and Sustainable Infrastructure projects.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower 0.14% today, on average, and underperformed their respective common stock issues by an average of 0.44%. So far in 2021, REIT Preferred stocks are higher by 10.95% on a price return basis and total returns of roughly 15%. Over in the bond markets today, commercial mREIT Blackstone Mortgage (BXMT) priced $400m of 3.750% senior secured notes due 2027.

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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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