Lows Of The Year • Hot PPI • Apartment Deal

• U.S. equity markets dipped to the lowest levels of the year Wednesday after producer inflation data failed to show signs of significant cooling as the focus turns to CPI data tomorrow.
• Declining for the sixth straight session and dipping to the lowest level since November 2020, the S&P 500 declined another 0.3% today while the tech-heavy Nasdaq 100 finished fractionally lower.
• The downside pressure on real estate equities resumed after a reprieve on Tuesday as interest rates hovered near multi-decade highs. The Equity REIT Index slipped 1.1% with 14-of-18 property sectors lower.
• Inflation data this morning showed that wholesale producer prices rose slightly faster than expected in September with the headline PPI Index rising 0.4% for the month and 8.5% from last year.
• Tricon Residential (TCN) advanced 1.5% today after it announced an agreement to sell its remaining apartment assets to complete its shift towards a pure-play single-family rental REIT. Elsewhere, a pair of hotel REITs provided business updates showing solid performance in September.

Income Builder Daily Recap

U.S. equity markets dipped to the lowest levels of the year Wednesday after producer inflation data failed to show signs of significant cooling as the focus turns to the critical CPI inflation report tomorrow morning. Declining for the sixth straight session and dipping to the lowest level since November 2020, the S&P 500 declined another 0.3% today while the tech-heavy Nasdaq 100 finished fractionally lower. The Mid-Cap 400 and Small-Cap 600 were each lower by 0.5%. The downside pressure on real estate equities resumed after a brief reprieve on Tuesday as long-term interest rates hovered near multi-decade highs. The Equity REIT Index slipped 1.1% with 14-of-18 property sectors in negative territory while the Mortgage REIT Index declined 0.8%.

Inflation data this morning showed that wholesale producer prices rose slightly faster than expected in September with the headline PPI Index rising 0.4% for the month - hotter than the 0.2% gain expected. On a 12-month basis, PPI rose 8.5%, which was a slight cooldown from the 8.7% rate in August. The Core PPI Index increased 0.3% for the month and 7.2% over the past year - roughly in line with expectations. The 10-Year Treasury Yield ended the session at 3.90% - retreating about 5 basis points late in the session after the release of FOMC Minutes from the September meeting. Crude Oil slipped for the third session on growth concerns despite back-and-forth threats between Russia and Western nations over energy supplies. Eight of the eleven GICS equity sectors finished lower on the day with Utilities (XLU) stocks lagging on the downside while Energy (XLE) stocks were upside standouts.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Single-Family Rental: Tricon Residential (TCN) advanced 1.5% today after it announced an agreement to sell its 20% equity interest in a portfolio of 23 Sun Belt apartment buildings for $315 million, which the company noted represents "a significant step in our quest to simplify our business and focus our balance sheet exposure primarily on single-family rental, where we continue to see strong demand and growth opportunities.” The interest is being acquired by a "vertically integrated residential real estate investment and property management company" which will assume all asset and property management responsibilities after a customary transition period. The transaction remains subject to customary closing conditions and is expected to close on or around October 18. Last October, Tricon Residential completed its dual-listing in the U.S. in a $570M IPO after trading exclusively on the Toronto Stock Exchange since 2010.

Hotels: Braemar Hotels (BHR) advanced 1.5% today after it reported strong preliminary Q3 metrics which were highlighted by Revenue Per Available Room ("RevPAR") levels that were 19% above comparable pre-pandemic levels in Q3 2019. BHR noted continued momentum into September with RevPAR levels that were 16% above September 2019. Ashford Hotels (AHT) rallied nearly 5% after it reported that its RevPAR was 4% below 2019-levels in Q3, but returned to pre-pandemic levels in September with comparable RevPAR that was 0.4% above September 2019. In our report last week - Hotel REITs: Winter Is Coming - we noted that recent TSA Checkpoint data has indicated that domestic travel throughput briefly exceeded 100% of pre-pandemic levels in late August before moderating back towards the 90% level that it's hovered around since March. We remain skeptical over the sustainability of the recovery in the upscale urban markets given the complexion of the RevPAR recovery, driven by pent-up domestic leisure travel and surging room rates while business and international travel remain slow to recover.

Storage: The Producer Price Index for self-storage facilities - which has historically exhibited a near-perfect correlation with rent growth - showed another brisk month-over-month gain of 1.5% in September, pushing the year-over-year advance to 16.9% - just below the record-high rate of 17.9% set in April. Earlier this week we published Self-Storage REITs: Locked-In and Sticky which discussed how storage REITs have defied expectations to the upside as comprehensively as any real estate sector since the start of the pandemic, delivering earnings growth of over 50% since 2019. While the rate-driven slowdown in housing market activity is expected to temper incremental storage demand, recent data and interim REIT updates have indicated "sticky" demand trends continued deep into the third quarter. Given the deeply discounted valuations, we like the risk/reward at these levels, given the strong balance sheets, low cap-ex needs, and operational track record.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs held onto much of yesterday's rally which was sparked by a trio of business updates from Annaly Capital (NLY), AGNC Investment (AGNC), and Dynex Capital (DX) which showed that book value declines were less catastrophic in Q3 than many feared. The updates continued today as Armour Residential REIT (ARR) slipped about 3% after reporting that its book value per share was $5.81 at the end of Q3 - down about 19.8% during the quarter - but less steep than its roughly 30% share price decline during that period. The upside standouts today included Apollo Commercial (ARI), Broadmark Realty (BRMK), and Lument Finance (LFT).

Economic Data This Week

The busy week of inflation data continues on Thursday when the BLS will report the Consumer Price Index which investors - and the Fed - are hoping to show that the fastest pace of year-over-year increases is finally behind us. The headline CPI is expected to moderate to an 8.1% year-over-year rate but the Core CPI is expected to accelerate slightly to 6.5% as the effects of the delayed recognition of housing inflation from 2021 continue to add upward pressure to the metrics. Consumer gas prices were, on average, 7% lower in September compared to the prior month but have since jumped by 8% from their bottom on September 18th. On Friday, we'll see Retail Sales data and get our first look at Michigan Consumer Sentiment for September. The Fed is particularly interested in the 5-Year Inflation Expectations survey, looking for signs of a potential "wage-price inflation spiral" through elevated consumer wage expectations.

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