Inflation Cools • REITs Lead • Fed Ahead

• U.S. equity markets rallied Tuesday after CPI inflation data showed a continued cooling of price pressures, raising hopes that the Fed can begin to scale back its aggressive tightening course.
• Despite giving back much of its early-session gains, the S&P 500 gained 1.0% on the day - finishing near session lows after rising as much as 3.2% immediately after the CPI report.
• Real estate equities - the sector with perhaps the most to gain from easing inflation and a potential Fed pivot - were among the leaders today.
• Peak Inflation? Perhaps. Investors received more "good news" on the inflation front this morning as the Consumer Price Index showed a cooler-than-expected increase in prices in November with the Headline and Core CPI coming in well below expectations,.
• The CPI-ex-Shelter Index was negative for the fourth month in the past five. Remarkably, in the five-month period beginning in July, CPI ex-Shelter has averaged a -1.9% annualized rate - among the most deflationary five-month periods in the CPI record.

Income Builder Daily Recap

U.S. equity markets rallied Tuesday after CPI inflation data showed a continued cooling of price pressures, raising hopes that the Fed can begin to scale back its aggressive tightening course and avoid a "hard landing." The S&P 500 advanced 1.0% on the day but finished near session lows after opening the session with nearly 3% gains while the tech-heavy Nasdaq 100 closed with gains of 1.3% today - nearly 4% below its early-session highs. Real estate equities - the sector with perhaps the most to gain from easing inflation and a potential Fed pivot - were among the leaders today with the Equity REIT Index advancing 2.0% today with 16-of-18 property sectors in positive-territory while the Mortgage REIT Index finished higher by 1.0%. Homebuilders gained nearly 2% as mortgage rates fell to three-month lows.

Peak Inflation? Perhaps. Investors received more "good news" on the inflation front this morning as the Consumer Price Index showed a cooler-than-expected increase in prices in November with the Headline and Core CPI coming in well below expectations, indicating that inflationary pressures may finally be rolling over amid a broader global economic slowdown. The Headline CPI Index slowed to a 7.1% year-over-year increase - the lowest since December 2021 - while the Core CPI Index slowed to below 6% - matching the lowest levels of the year. Notably, the CPI-ex-Shelter Index - the metric that we believe officials should most closely watch given the lagged effects of shelter inflation - was negative for the fourth month in the past five. Remarkably, since July, CPI ex-Shelter has averaged a -1.9% annualized rate - among the most deflationary five-month periods on record.

The cooler-than-expected CPI print dragged the 10-Year Treasury Yield to 3.50% today - down 11 basis points - but the 2-Year Treasury Yield dipped nearly 20 basis points as investors removed nearly one full 25-basis-point hike from the rate hike expectations curve. Ahead of the Fed's rate hike decision on Wednesday afternoon, the US Dollar Index continued its sharp decline seen over the past month, pushing its declines to nearly 10% from its late September highs. After dipping to three-month lows early last week, Crude Oil prices rebounded by 2% today. Bitcoin rebounded by more than 4% despite the arrest and fraud charges levied on former FTX CEO Sam Bankman-Fried. All eleven GICS equity sectors were higher on the session with Real Estate (XLRE) and Energy (XLE) stocks leading on the upside.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Casino: Today, we published Casino REITs: Hold 'Em As Others Fold 'Em. The lone property sector in positive territory this year, Casino REITs have benefited from their attractive “inflation-hedging” lease structure, the rebound in Las Vegas travel demand, and broader institutional investor acceptance. VICI boasts inflation-linked escalators on 96% of leases while GLPI benefits from indirect inflation hedges linked to tenant performance. Casino REITs have been thrust into the spotlight as apparent beneficiaries of outflows at Blackstone’s (BX) non-traded REIT platform BREIT, spawning a $5.5B acquisition of two Vegas casinos by VICI Properties (VICI). Balance sheet “firepower” and access to longer-term capital have become a significant competitive advantage for public REITs and VICI and GLPI appear particularly well-positioned to play offense while private peers seek an exit.

Data Center: Equinix (EQIX) rallied nearly 4% today after announcing plans to enter the South African market with a $160M data center investment in Johannesburg that augments its current footprint on the African continent in Nigeria, Ghana and Côte d'Ivoire. The new data center is expected to open in mid-2024 with 4.0MW of total capacity across 690+ cabinets. EQIX also received an analyst upgrade from Cowen with its REIT analyst Michael Elias classifying EQIX as one of its best ideas for 2023. We discussed last week in Data Center REITs: Positioned For Cloud Competition that property-level fundamentals have strengthened in recent quarters despite an expected downshift in cloud-related spending. Ironically, just as Data Center REITs became a trendy “short” idea centered on a thesis of weak pricing power and competition from hyperscalers, rental rate trends have meaningfully improved.

Apartment: While CPI data shows a continued acceleration in rental rate inflation to 40-year highs - which has contributed to the persistent upward pressure on the headline CPI metrics - the more real-time rent metrics continue to show a moderation back towards the broader inflation rate. Zillow (Z) released its monthly rent index data this morning which showed that national rent growth recorded a second-straight monthly decline in November. Notably, 48 of the top 60 markets recorded negative month-over-month rent growth for the month - up from about half in the prior month. The Zillow US National Rent Average remains higher by 8.4% Y/Y in November - but this is down sharply from the peak in February at +17.1%. We noted above that CPI excluding Shelter has averaged -1.9% annualized since July. By comparison, rental rates have risen at a roughly 3.5% annualized rate.

Office: Highwoods (HIW) advanced 2% today after it announced a 50/50 joint venture to construct Midtown East in Tampa, Florida with The Bromley Companies with a total value of $83 million. Located in Tampa’s Westshore submarket, the 18-story tower be the future headquarters of Tampa Electric and Peoples Gas. Construction of the project is expected to begin in the first quarter of 2023 with a scheduled completion date in the first quarter of 2025 and a pro forma stabilization date in the second quarter of 2026. Highwoods currently owns an 80% interest in a joint venture with The Bromley Companies that developed and owns Midtown West, a 150,000 square foot, $71 million office project completed in the second quarter of 2021 that was 92.5% leased as of September 30, 2022. Last week we noted that recent data from Kastle Systems shows that average office utilization rates remain below 50% of pre-pandemic levels with coastal urban markets continuing to lag.

Additional Headlines from The Daily REITBeat on Income Builder

• BMO initiates CUZ with an Outperform rating ($29 price target)
• EF Hutton initiates UMH with a Buy rating ($21 price target)
• Cowen upgrades EQIX to Outperform from Market Perform (raise price target by $81 to $811)
• JMP downgrades SBRA to Market Perform from Market Outperform
• PEI obtained approval from Fairfax County to develop 460 apartments and a 165-room hotel which PEI expects to sell to developers for approximately $20 million.
• WY announced with Denbury, Inc. an agreement for the evaluation and potential development of a CO2 sequestration site in Mississippi
• PSA announced the reopening of an expanded facility in Cupertino, CA which features two five-level buildings. The facility now includes 2,593 climate-controlled units, up from 585 before the renovation.
• Gladstone Commercial (GOOD) announced a share repurchase program for up to $20M of its 6.625% Series E Cumulative Redeemable Preferred Stock and 6.00% Series G Cumulative Redeemable Preferred Stock.
• ALEX announced the appointment of Lance K. Parker, - currently its COO to the additional position of president. Christopher J. Benjamin, currently president and chief executive officer, will remain the Company's CEO
• Income Builder Members receive access to The Daily REITBeat, an institutional-quality daily note that keeps subscribers apprised of pertinent news, data, and trends specifically within the REIT industry.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were higher today with residential mREITs gaining 0.4% while commercial mREITs advanced 0.7%. Yesterday afternoon, New York Mortgage (NYMT) and TPG Real Estate (TRTX) held their dividends steady at current levels. This afternoon, Orchid Island (ORC), KKR Real Estate (KREF), and Apollo Commercial (ARI) also held dividends steady at current levels. Last month, 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. Despite paying average dividend yields in the mid-teens, the majority of mREITs have been able to cover their dividends as improved earnings power from wider investment spreads have helped to offset book value declines.

Economic Data This Week

Following the CPI report this morning, the main event of the week comes on Wednesday with the FOMC Interest Rate Decision in which the Fed is widely expected to raise rates by 50 basis points to bring the Fed Funds rate to a 4.50% upper bound. Notably, market pricing indicates expectations of the terminal rate peaking at 5.25% next June. On Thursday, we'll also see Retail Sales data covering the early holiday shopping season which is expected to show a slight decline in seasonally-adjusted spending from the prior month.

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