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  • Alex Pettee, CFA

Relief Rally • U.K. U-Turn • Earnings Ahead

  • U.S. equity and bond markets rebounded Monday after decent results from Bank of America and a shift toward fiscal tightening in the U.K. helped to abate the seemingly relentless selling pressure.

  • Entering the week on the cusp of two-year lows amid a stretch of seven-of-nine weekly declines, the S&P 500 rebounded 2.7% today while the tech-heavy Nasdaq 100 gained 3.3%.

  • Real estate equities finally caught a bid today as earnings season kicks-off this afternoon. The Equity REIT Index rallied 3.8% today with all 18 property sectors in positive territory.

  • Manufactured housing REIT Equity Lifestyle (ELS) kicks-off earnings season this afternoon. REITs enter third-quarter earnings season with the lowest Price-to-FFO valuations - and highest dividend yields - since the Financial Crisis.

  • As corporate earnings season kicks into gear, we'll also see another busy slate of economic data in the week ahead with the U.S. housing market in focus - the industry that is bearing the brunt of the aggressive tightening path through the historic surge in mortgage rates.

 

Income Builder Daily Recap

U.S. equity and bond markets rebounded Monday after decent results from Bank of America and a shift toward fiscal tightening in the U.K. helped to abate the seemingly relentless selling pressure. Entering the week on the cusp of two-year lows amid a stretch of seven-of-nine weekly declines, the S&P 500 rebounded 2.7% today while the tech-heavy Nasdaq 100 gained 3.3%. Real estate equities finally caught a bid today as earnings season kicks-off this afternoon while the 10-Year Treasury Yield remained flat at around 4.0%. The Equity REIT Index rallied 3.8% today with all 18 property sectors in positive territory while the Mortgage REIT Index gained 2.2%.

As discussed in our Real Estate Weekly Outlook, there's hope that earnings season - and perhaps midterm elections - may be catalysts to finally form the long-awaited "bottom" with equity and bond markets already on-pace for the worst year of collective performance in a century while investor sentiment remains near historical lows. Bank of America (BAC) rallied more than 6% after noting that its customers' balance sheets remain fairly healthy despite the four-decade-high inflation rates. All eleven GICS equity sectors were higher on the day - led to the upside by the Consumer Discretionary (XLY) and Real Estate (XLRE) sectors. Crude Oil prices were roughly flat today following a volatile two weeks in the wake of OPEC's announced production cuts while the US Dollar retreated from two-decade highs.

As corporate earnings season kicks into gear, we'll also see another busy slate of economic data in the week ahead with the U.S. housing market in focus - the industry that is bearing the brunt of the aggressive tightening path through the historic surge in mortgage rates. On Tuesday, we'll see NAHB Homebuilder Sentiment data for September which is expected to decline to the lowest level since 2014 - excluding the brief pandemic dip in April and May 2020. On Wednesday, we'll see Housing Starts and Building Permits data which is expected to show a further pull-back in home construction activity to levels below that of late 2019 before the pandemic boom. On Thursday, Existing Home Sales data is also expected to dip to the lowest levels since 2014 excluding the pandemic shutdown months. We'll also be watching Jobless Claims data on Thursday, which has exhibited notable weakening since late September across both initial and continuing unemployment claims.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Today we published our Real Estate Earnings Preview on the Income Builder Marketplace. Slammed by the historic surge in interest rates over the past six months, REITs enter third-quarter earnings season with the lowest valuations - and highest dividend yields - since the Financial Crisis. How REITs are responding to this higher rate environment – both on the acquisitions and the financing side- will be closely watched and we expect most REITs to significantly scale back external-growth plans. Real estate asset values will also be a major theme – particularly on the residential side. We’re not yet seeing “distress” in the private real estate markets, but the heat has certainly been turned up to an uncomfortable degree for many more highly-levered players which could facilitate some attractive opportunistic M&A for more well-capitalized REITs. Manufactured housing REIT Equity Lifestyle (ELS) kicks-off earnings season this afternoon.

Apartments: Washington Real Estate (WRE) - one of two office REITs that has shifted its focus to the multifamily sector over the past two years - announced that it has changed its name and rebranded as Elme Communities reflecting its "ongoing commitment to elevating the value-living experience for its residents." The company will continue trading on the New York Stock Exchange under its existing ticker symbol until October 20, 2022 when its new ticker symbol, “ELME,” is expected to become effective. The state of the U.S. housing market will be a critical focus throughout earnings season. The latest report from Zillow (Z) showed that while rent growth has indeed cooled from the double-digit rates seen earlier this year, the month-over-month rent growth in September - the slowest growth in nearly two years - was still triple the average rates seen from 2015-2019. We'll again be watching rent growth trends on new and renewed leases - and expect the Federal Reserve will be listening closely as well.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were broadly higher today with commercial mREITs rallying more than 3% while residential mREITs advanced 1.3%. Broadmark Realty (BRMK) was among the leaders after it held its monthly dividend steady at $0.07/share while other upside standouts today included Lument Finance (LFT), Franklin BSP (FBRT), and TPG Real Estate (TRTX). While mREIT earnings season doesn't formally begin until next week, we've heard preliminary results from a handful of residential mREITs over the past several sessions including this afternoon from MFA Financial (MFA), which reported that its estimated Book Value Per Share ("BVPS") was $15.25-$15.40 at the end of Q3 - down only 6.5% at the midpoint from the end of Q2.

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.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.


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The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.


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