REIT M&A • Stocks Rebound • Yields Retreat

• U.S. equity markets finished broadly higher in a quiet pre-holiday session Tuesday lifted by a solid slate of retail earnings results and a slightly less hawkish tone from Fed officials.
• Closing at its highest-level in two months, the S&P 500 advanced 1.4% today - trimming its year-to-date drawdown to under 16% - while the tech-heavy Nasdaq 100 advanced 1.4%.
• Real estate equities were also higher today with the Equity REIT Index advancing 0.6% with 13-of-18 property sectors in positive territory while the Mortgage REIT Index gained 1.3%.
• Veris Residential (VRE) rallied more than 3% on reports that private equity firm Fortress Investment Group agreed to help fund Kushner Cos.’ unsolicited $4.3B bid to acquire the apartment REIT.
• A reported rise in COVID cases in China contributed to downside pressure on interest rates today with the 10-Year Treasury Yield slipping 7 basis points to close at 3.76% - sending the 10-2 Yield Curve back to its deepest inversion since 1982.

Income Builder Daily Recap

U.S. equity markets and bond markets finished broadly higher in a quiet pre-holiday session Tuesday lifted by a solid slate of retail earnings results and a slightly less hawkish tone from Fed officials. Closing at its highest level in two months, the S&P 500 advanced 1.4% today - trimming its year-to-date drawdown to under 16% - while the tech-heavy Nasdaq 100 finished higher by 1.4% today. Led on the upside today by retail and hotel REITs, the Equity REIT Index advanced 0.6% with 13-of-18 property sectors in positive territory while the Mortgage REIT Index gained 1.3%. Homebuilders rallied nearly 3% following a slate of analyst upgrades citing a "favorable risk-reward" balance for the beaten-down housing industry.

A reported rise in COVID cases in China contributed to downside pressure on interest rates today with the 10-Year Treasury Yield slipping 7 basis points to close at 3.76% - sending the 10-2 Yield Curve back to its deepest inversion since 1982. Energy (XLE) stocks were the top-performing GICS equity sector today as Crude Oil prices rebounded after flirting with three-month lows in the prior session. Ahead of the peak holiday shopping season - including Black Friday this week - consumer stocks were among the leaders today following surprisingly strong results from retailers Best Buy (BBBY) and Abercrombie (ANF), a positive read-through for shopping center and mall REITs as well.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Apartment: Veris Residential (VRE) rallied more than 3% on reports that private equity firm Fortress Investment Group agreed to help fund Kushner Cos.’ unsolicited $4.3B bid to acquire the apartment REIT. Citing a November 17th letter from Fortress to Veris's board, the WSJ reported that Fortress was prepared to back the debt and equity needed to complete Kushner’s offer to buy Veris for $16 a share offer - an offer initially made back in October which was subsequently rejected by the Veris Board, noting that the offer "grossly undervalues the company in its current form." Separately, Apartment Income REIT (AIRC) - which we own in the REIT Focused Income Portfolio - announced yesterday that it sold its New England portfolio of six communities with 1,314 apartment units for $500 million, representing a roughly 4.4% cap rate. Since the end of 2020, AIR has completed $2.2 billion of property sales as it recycles capital from Coastal markets into Sunbelt markets.

Cell Tower: Crown Castle (CCI) - which we own in the REIT Focused Income Portfolio - received a credit rating upgrade from S&P, which raised CCI's issuer credit rating and issue-level rating on its senior unsecured debt to “BBB” from “BBB-“ with a stable outlook. Separately, DigitalBridge (DBRG) gained 0.2% today after it announced that it acquired an ownership stake in Malaysia-based data center operator AIMS alongside the formation of an edge data center platform focused on the high-growth markets of the Southeast Asia region. DBRG announced earlier this year that it will shift its focus to an "asset-lite" model of investment management and will no longer qualify as a REIT.

Yesterday we published our State of the REIT Nation Report, which analyzes high-level commercial real estate fundamentals. Of note, private real estate markets are finally "catching up" to the reality of sharply higher interest rates which have been reflected in public real estate markets for several quarters. Green Street Advisors' data shows that private-market values of commercial real estate properties have dipped nearly 13% over the past six months after a historically sharp 8% decline in October alone. Due to conservative balance sheet management over the past decade, REITs have been able to "hunker down" during this period of rising rates - avoiding the type of dilutive and high-cost capital raises that were necessary during the Financial Crisis. Obscured by the macro narrative, REIT property-level fundamentals have remained quite strong in recent quarters.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were broadly higher today with residential mREITs advancing 0.8% while commercial mREITs gained 0.6%. iStar (STAR) provided logistics today on its pending merger with its subsidiary Safehold (SAFE) in which STAR will pay a special dividend valued at roughly $190M to SAFE holders which will be finalized prior to the Nov. 30 ex-dividend date. STAR will suspend the payment of quarterly cash dividends through the closing of its merger. Elsewhere, ARMOUR Residential REIT (ARR) advanced 0.4% today after it held its monthly dividend steady at $0.10/share, representing a forward dividend yield of 21.15%.

Last week, we published Mortgage REITs: High Yields Are Fine, For Now. Mortgage REITs - which were left for dead amid a historically brutal year across fixed-income markets - have rebounded in recent weeks as earnings results were not as catastrophic as feared. Mortgage REITs are now outperforming Equity REITs for the year, and we continue to see value in a modest allocation towards higher-quality mREITs in a balanced income-focused real estate portfolio. Despite paying average dividend yields in the mid-teens, the majority of mREITs were able to cover their dividends as improved earnings power from wider investment spreads offset book value declines, but we flagged a handful of mREITs with payout ratios above 100% of EPS.

Economic Data This Week

The economic calendar slows down in the Thanksgiving-shorted holiday week. On Wednesday, we'll see New Home Sales data for October which is expected to show similar trends of slowing as seen in the Housing Starts and Permits data seen this past week. We'll also see a handful of Purchasing Managers Index ("PMI") reports on Wednesday from S&P Global and the Institute for Supply Management. Each of these major surveys is expected to post readings below the breakeven-50 level, indicating that the Manufacturing and Services sectors were contracting in early November. We'll also be watching Jobless Claims data on Wednesday given the recent wave of thousands of announced layoffs from major technology companies. Markets will be closed on Thursday for Thanksgiving and will have a shortened session on Friday with the NYSE Closing Bell at 1pm.

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