Yields Jump • Recession Watch • Fed Ahead
U.S. equity markets were under pressure again Tuesday as benchmark interest rates climbed to fresh multi-decade highs as investors brace for the Federal Reserve rate decision on Wednesday afternoon.
Giving back yesterday's gains turning negative on the week, the S&P 500 slipped 1.1% today as the 10-Year Treasury Yield climbed to its highest level since 2007. The Dow dipped 300-points.
Real estate equities were among the laggards today with the Equity REIT Index sliding 2.4% with all 18 property sectors in negative territory while the Mortgage REIT Index slipped 1.6%.
With the Fed expected to hike rates by another 75 basis points, the Atlanta Fed's GDPNow downwardly revised its Q3 GDP projection once again, which is now dangerously close to projecting a third-straight quarter of GDP contraction.
The downward revision today was prompted by a mixed slate of home construction data as the Census Bureau reported a steep drop in single-family building permits in August, which overshadowed a better-than-expected rise in total housing starts driven by strength in multifamily construction.
Real Estate Daily Recap
U.S. equity markets were under pressure again Tuesday as benchmark interest rates climbed to fresh multi-decade highs as investors brace for the Federal Reserve rate decision on Wednesday afternoon. Giving back yesterday's gains turning negative on the week, the S&P 500 slipped 1.1% today as the 10-Year Treasury Yield closed at its highest level since 2007 at 3.57%. Real estate equities were among the laggards today with the Equity REIT Index sliding 2.4% with all 18 property sectors in negative territory. The Mortgage REIT Index slipped 1.6% while homebuilders remained under pressure on data showing a continued moderation in single-family home construction.
All eleven GICS equity sectors finished lower today while Crude Oil declined 1% and the US Dollar Index pushed through fresh two-decade highs. With the Federal Reserve expected to hike rates by another 75 basis points tomorrow afternoon, investors parsed another slate of downbeat economic data this morning which prompted another downward revision to the Atlanta Fed's GDPNow model, which is now dangerously close to projecting a third-straight quarter of GDP contraction. The Atlanta Fed's model - which accurately foretold the unexpected contraction last quarter - now forecasts GDP growth of just 0.3% in Q3 - down sharply from its 2.6% forecast two weeks ago. The Atlanta Fed's metric tracking the Blue Chip consensus - based on the monthly Blue Chip Economic Indicators survey - now projects negative GDP growth at the median in its latest survey.
Since 1975, the U.S. has recorded three-straight quarters of negative GDP growth only once - during the Great Financial Crisis from Q3 2008 - Q2 2009. The downward revision today was prompted by a mixed slate of home construction data as the Census Bureau reported a steep drop in single-family building permits in August, which overshadowed a better-than-expected rise in total housing starts driven by strength in multifamily construction. Consistent with downbeat homebuilder sentiment data on Monday, single-family permits fell to an 899k annualized rate in August, its lowest level since June 2020. Of note, despite the post-pandemic uptick in single-family home construction activity amid an unprecedented surge in housing demand, construction levels remained significantly below the long-term historical averages.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Single-Family Rental: Bluerock Residential Growth (BRG) announced that its Board of Directors approved the distribution to its shareholders of all of the outstanding shares of common stock of Bluerock Homes Trust, which will become the holder of the Company’s single-family rental business which is expected to be completed on October 6th before the opening of the New York Stock Exchange American. BRG - which will continue to hold the Company’s multi-family rental business - expects to complete the previously announced acquisition by affiliates of Blackstone Real Estate (BX) promptly following the completion of the Spin-Off. Joining the trio of SFR REITs - Invitation Homes (INVH), American Homes (AMH), and Tricon Residential (TCN), Bluerock Homes Trust will trade on the NYSE American under the symbol "BHM" and will own interests in approximately 3,400 homes, including 2,000 through preferred/mezzanine investments.
Hotels: Pebblebrook (PEB) was among the better performers today after providing an update on recent operating trends. PEB noted that its Revenue Per Available Room ("RevPAR") exceeded the comparable pre-pandemic level in July by 3%, but reported that demand cooled in August as its comparable RevPAR was back to 3% below pre-pandemic levels. Also of note, PEB commented that in early September, it "saw a significant spike in occupancy as business travel returned following the holiday period. For the first time since the pandemic began, occupancy in the most recent September week exceeded 80%, with every day but Sunday exceeding 80%. According to recent TSA Checkpoint data, travel demand has again moderated a bit over the past couple of weeks following a late-summer surge that saw throughput exceed 100% of pre-pandemic levels for the first time since March 2020.
Cannabis: Innovative Industrial (IIPR) - which surged 12% yesterday after disclosing in an 8-K last Friday that it reached a confidential settlement with Kings Garden which had defaulted on its rent and property management fees in July - gave back half of yesterday's rebound today. IIPR leases six properties from IIPR which comprise roughly 8% of IIPR's revenue in 2021. Research firm Compass Point upgraded IIPR to Buy from Neutral, citing the positive indication from the combination of the settlement and the dividend hike which "sent a signal that management is confident of its ability to collect lease payments from its tenants." The ten largest publicly-traded cannabis REIT tenant operators have plunged between 50% and 80% over the past year, hurt in part by a slowdown in stimulus-fueled sales growth and by a far more-difficult capital raising environment amid tightening credit conditions.
As noted yesterday, hotel REIT Hersha Hospitality (HT) resumed its dividend that had been suspended since March 2020, declaring a $0.05/share quarterly dividend, representing a forward yield of roughly 2.1%. STORE Capital (STOR) - which announced last week that it will be acquired by GIC and Blue Owl's Oak Street for $32.25 in cash - hiked its dividend by 6.5%, becoming the 108th REIT to raise its dividend this year. STOR also reiterated that under the terms of its merger agreement, following the payment of this dividend, the company may not pay further dividends, except as necessary to preserve its tax status as a REIT. As discussed this week in 100 REIT Dividend Hikes - our State of the REIT Nation Report - property-level fundamentals have been quite strong - and strengthening - for most property sectors in recent quarters despite the broader economic slowdown this year - and despite the wave of dividend hikes over the past 18 months, dividend payout ratios remain far below historic averages.
Mortgage REIT Daily Recap
Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were also under pressure today with residential mREITs declining 1.4% while commercial mREITs also slipped 1.4%. Ellington Financial (EFC) declined 1.2% today after reporting yesterday afternoon that its estimated book value per share ("BVPS") was $15.99 as of August 31st - down about 2% from its $16.32 estimate BVPS at the end of July. On an otherwise quiet day of newsflow, NexPoint Real Estate (NREF) and Ladder Capital (LADR) led on the upside while Angel Oak (AOMR) and iStar (STAR) were the laggards on the day.
Economic Data This Week
While all eyes will be on the Federal Reserve in the week ahead, we'll also see a jam-packed slate of housing data - the industry that is bearing the brunt of the aggressive tightening path through the historic surge in mortgage rates. Today we saw NAHB Homebuilder Sentiment data for September which declined to the lowest level since 2014 - excluding the brief pandemic dip in April and May 2020. On Tuesday, we'll see Housing Starts and Building Permits data which is expected to show a further pull-back in home construction activity to post-pandemic lows. On Wednesday, Existing Home Sales data is also expected to dip to the lowest levels since 2014 excluding the pandemic shutdown months. The main event will be on Wednesday with the FOMC Interest Rate Decision in which Fed is expected to hike rates by 75 basis points for a third-straight meeting to a 3.25% upper-bound - levels last seen in July 2005.
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.
This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.
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.
Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.
Hoya Capital Real Estate and Hoya Capital Research & Index Innovations have no business relationship with any company discussed or mentioned and never receives compensation from any company discussed or mentioned. Hoya Capital Real Estate, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and additional important disclosures is available at www.HoyaCapital.com.