• U.S. equity and bond markets rebounded for a second-straight session Tuesday as a decent start to corporate earnings season and stabilization in global sovereign bond markets lifted markets from two-year-lows.
• Following gains of 2.7% on Monday, the S&P 500 advanced 1.2% today in a choppy session while the tech-heavy Nasdaq 100 advanced 0.8%.
• Real estate equities finished mostly higher today as long-term interest rates ticked lower with the Equity REIT Index advancing 1.1% today with 15-of-18 property sectors in positive territory. Mortgage REITs gained 2%.
• Equity Lifestyle (ELS) kicked off REIT earnings season with a decent report in light of the Hurricane Ian uncertainty. ELS indicated that it'll incur a roughly 2% hit to FFO from the storm, but provided 2023 guidance pointing to record-high rent growth.
• A pair of mortgage REITs - AG Mortgage (MITT) and MFA Financial (MFA) - rallied 9% after reporting modest 5-7% book value declines in Q3 despite the historically brutal quarter for fixed income and mortgage-related securities.

Income Builder Daily Recap

U.S. equity and bond markets rebounded for a second-straight session Tuesday as a decent start to corporate earnings season and stabilization in the global sovereign bond markets lifted markets from two-year lows. Following gains of 2.7% on Monday, the S&P 500 advanced 1.2% today in a choppy session while the tech-heavy Nasdaq 100 advanced 0.8%. Crude Oil prices dipped 2% on reports that the Biden administration plans to sell more oil from the U.S. Strategic Petroleum Reserve in a bid to dampen fuel prices before next month's midterm elections. Real estate equities were also broadly higher today as long-term interest rates ticked marginally lower with the Equity REIT Index advancing 1.1% today with 15-of-18 property sectors in positive territory while the Mortgage REIT Index gained 1.8%.

Bad news is good news? Homebuilders rallied 3% today despite a sharp dip in homebuilder sentiment, which declined for a 10th straight month in October as the historic surge in mortgage rates this year has rapidly turned the U.S. single-family housing market from red-hot to icy-cold. The NAHB's Housing Market Index fell 8 points to 38 in October - the lowest level for homebuilder confidence since September 2012 excluding the brief pandemic dip during the "shutdown months" in April and May 2020. The 10 straight months of decline is the longest stretch on record back to 1985. Spotlighting a paradox in modern central bank theory which holds that raising the cost of borrowing results in lower inflation, the monthly mortgage payment required to buy the average-priced home in the United States has nearly doubled over the past twelve months, and the resulting slowdown in the pace of new home construction is likely to exacerbate longer-term inflationary pressures in housing markets, which continue to face lingering supply shortages.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Manufactured Housing: Equity Lifestyle (ELS) kicked off REIT earnings season with a decent report in light of the Hurricane Ian uncertainty. ELS noted that six of its Fort Myers properties - four RV parks and two marinas - remain closed and are expected to reopen by year-end. It did not record any storm-related expenses in Q3, but did record a $3.7 million write-down in the carrying value of these assets and revised its full-year Core FFO outlook to $2.67 at the midpoint - down about 2% from its prior outlook of $2.73 - and consistent with our forecast of a 1-2% FFO hit from the storm. While ELS did not provide formal guidance for 2023, it did note that it plans to send out rent 2023 increases on its MH properties in the range of 6.2%-6.6% - up from the roughly 5.3% rate increase in 2022 - and increases on its RV properties in the range of 7.6% to 8.0% - up from the roughly 6.6% rate increase in 2022. These record-high pace of rent increases are consistent with our expectation that MH REITs will leverage the record-setting cost-of-living adjustment (COLA), which should result in a roughly 9% rise in benefits to a significant percentage of MH REITs' resident base.

Yesterday 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. We'll see results tomorrow from a trio of industrial REITs: Rexford (REXR), First Industrial (FR), and Prologis (PLD), along with 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 continued to rebound today with residential mREITs gaining more than 2% while commercial mREITs advanced 1%. AG Mortgage (MITT) soared nearly 9% after reporting that its estimated Book Value Per Share ("BVPS") was $10.68 at the end of Q3 - down just 4% during the quarter - and a significantly more-muted decline than expected. MFA Financial (MFA) also rallied nearly 9% after reporting that its estimated Book Value Per Share ("BVPS") at the end of Q3 was $15.33 - down just 6.7% in the quarter - also significantly better than feared. Last week, updates from a half-dozen agency-focused residential mREITs showed BVPS declines ranging from 10-20% in Q3, but BVPS declines have been more muted for non-agency 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'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.

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