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  • Alex Pettee, CFA

Yields Surge • Global Inflation • Prologis Earnings

  • U.S. equity and bond markets snapped a two-day rally Wednesday as hotter-than-expected inflation data in the U.K. and Canada lifted domestic interest rates to the highest levels since 2007.

  • Retreating after a two-day rebound but still hanging-onto weekly gains of 3%, the S&P 500 slipped 0.7% today but Mid-Caps and Small-Caps were under more pressure with declines of over 1.5%.

  • Real estate equities were hit particularly hard today amid the surge in longer-term interest rates with the Equity REIT Index declining 2.4% today with all 18 property sectors in negative territory.

  • Inflation isn't just a U.S. problem: Global sovereign bond yields swelled higher today on data showing double-digit inflation rates in the U.K. and similarly-persistent price pressures in Canada.

  • Industrial REIT Prologis (PLD) dipped about 4% today despite reporting strong results and raising its property-level growth outlook, but softness in its third-party asset management business along with commentary on the firm's "cautious" capital allocation strategy and its assumption of "further macro deterioration" weighed on the stock price.

 

Income Builder Daily Recap

U.S. equity and bond markets snapped a two-day rally Wednesday as hotter-than-expected inflation data in the U.K. and Canada lifted domestic interest rates to the highest levels since 2007. Retreating after a two-day rebound but still hanging-onto weekly gains of 3%, the S&P 500 slipped 0.7% today but Mid-Caps and Small-Caps were under more pressure with declines of over 1.5%. Real estate equities were hit particularly hard today amid the surge in longer-term interest rates with the Equity REIT Index declining 2.4% today with all 18 property sectors in negative territory while the Mortgage REIT Index slipped 1.4%. Homebuilders slid 5% following weaker-than-expected Housing Starts data as construction activity has cooled considerably amid the historic surge in mortgage rates this year.

Global sovereign bond yields swelled higher today on data showing double-digit inflation rates in the U.K. and similarly-persistent price pressures in Canada, pressuring the U.S. 10-Year Treasury Yield higher by 13 basis points to 4.13% - the highest close since 2007. The U.S. Dollar rebounded today and remains near two-decade highs. After a pullback yesterday on reports that the Biden administration plans to sell more oil from the U.S. Strategic Petroleum Reserve, Crude Oil and Gasoline prices advanced 2% today. Nine of the eleven GICS equity sectors finished lower today with Energy (XLE) and Communications (XLC) stocks the upside standouts while Real Estate (XLRE) and Financials (XLF) stocks lagged.


Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Industrial: Sector stalwart Prologis (PLD) dipped about 4% today despite reporting strong results and raising its property-level NOI growth outlook, but softness in its third-party asset management business and commentary on the firm's "cautious" capital allocation strategy and assumption of "further macro deterioration" weighed on the stock price. Property-level fundamentals remain stellar with Prologis reporting a record-high effective leasing spread of 59.7% and record-high cash same-store NOI growth at 9.3%. While the company raised its comparable 2022 FFO growth target by 120 basis points to 11.1% and its same-store 2022 NOI target to 8.6%, investor redemptions in its third-party asset management business dragged on its Net Promote Income, resulting in downward revisions to several 2022 targets including development starts, dispositions, and contributions. We'll hear results this afternoon from Rexford (REXR) and First Industrial (FR).

Today we published our REIT Earnings Preview: REITs Are Historically Cheap. 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. We'll hear reports this afternoon from cell tower REIT Crown Castle (CCI) and office REIT SL Green (SLG).

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs gave back some of their early-week gains today as residential mREITs and commercial mREITs each declined 1.4%. Ellington Financial (EFC) was among the leaders today after it reported that its estimated Book Value Per Share ("BVPS") was $15.22 at the end of Q3 - down just 5.8% during the quarter. that have reported BVPS declines ranging from -4% to -21%. As noted in our REIT Earnings Preview, over the past week, we've heard preliminary results from ten mREITs which showed BVPS declines ranging from 4-20% in Q3, but BVPS declines have been more muted for credit-focused mREITs compared to pure-play agency-focused mREITs.

Economic Data This Week

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 saw NAHB Homebuilder Sentiment data for September which declined to the lowest level since 2012 - excluding the brief pandemic dip in April and May 2020. Today we saw Housing Starts and Building Permits data which showed 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.

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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