• U.S. equity markets were mixed Thursday while benchmark interest rates dipped to the lowest levels of the year as investors cast doubt on the Federal Reserve's economic and rate projections.

• After dipping nearly 2% in the final hour of trading on Wednesday, the S&P 500 finished higher by 0.3% today in another choppy session, but the Mid-Cap and Small-Cap benchmarks declined.

• Real estate equities remained under pressure today despite the retreat in benchmark interest rates, with office, hotel, and retail REITs dragging on the downside.

• Blackstone (BX) stopped making debt payments on its Hughes Center office campus in Las Vegas with public filing citing an inability to fund future monthly payments, which follows defaults over the past two months from Pimco, Brookfield, and RXR.

• Western Asset Mortgage (WMC) was among the better-performers today despite reducing its dividend by about 13% to $0.35/share, but noted that its Book Value Per Share increased about 8% this year.

U.S. equity markets were mixed Thursday while benchmark interest rates dipped to the lowest levels of the year as investors cast doubt on the Federal Reserve's economic and interest rate projections. After dipping nearly 2% in the final hour of trading on Wednesday, the S&P 500 finished higher by 0.3% today in another choppy session, but the Mid-Cap 400 and Small-Cap 600 each declined by 0.5%. Technology stocks continued to defy recent banking-related headwinds as the tech-heavy Nasdaq 100 rallied another 1% today. Real estate equities remained under pressure today despite the retreat in benchmark interest rates, with office, hotel, and retail REITs dragging on the downside. The Equity REIT Index declined 0.6% today with 16-of-18 property sectors in negative territory, while the Mortgage REIT Index declined by 1.6%. 

The chasm between market expectations and Federal Reserve guidance widened further in the wake of the Fed's latest rate hike and economic projections on Wednesday. Central bankers see the policy rate at 5.1% at the end of 2023 - more than 100 basis points above the roughly 4.0% rate implied in swaps markets. Unsettled questions over the fate of several regional banks kept downward pressure on the policy-sensitive 2-Year Treasury Yield, which dipped another 16 basis points to 3.80% at the close today - its lowest close since last September - while the 10-Year Treasury Yield dipped to 3.41% - its second-lowest close since September. Nine of the eleven GICS equity sectors finished lower on the season, with Financial (XLF), Energy (XLE), and Utilities (XLE) stocks dragging on the downside. 

Homebuilders were a bright spot today on data showing a rebound in New Home Sales alongside a retreat in mortgage rates, suggesting the housing market is beginning to stabilize after a tumultuous year. Purchases of new single-family homes increased 1.1% to an annualized 640,000 pace after a 633,000 rate in January. The median estimate called for a 650,000 pace. Earlier this week, the NAR reported that Existing Home Sales rose 14.5% in February compared with January to an annualized rate of 4.58 million units, which was the first monthly gain in 12 months and the largest increase since July 2020. Freddie Mac reported today that the 30-year fixed-rate mortgage averaged 6.42% this past week, down 18 basis points from the previous week and 66 basis points below the highs last November of 6.42%. 

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Office: The relentless downward pressure on office REITs continued today with more than a dozen names lower by at least 5% as regional bank loans secured by office properties have become a source of scrutiny amid a recent wave of loan defaults. This week, Blackstone (BX) stopped making debt payments on its Hughes Center office campus in Las Vegas with public filing citing an inability to fund future monthly payments, which follows defaults over the past two months from Pimco, Brookfield, and RXR. Variable rate mortgage debt - and a lot of it - has been the common thread across these defaults. While the average office REIT uses just a fraction of the variable rate debt seen in these instances - and have perhaps the most "equity-rich" balance sheets among institutional office investors - there is concern that the gravity of private market distress will overwhelm any benefits of their comparative advantage.  

Net Lease: Yesterday, we published Net Lease REITs: Avoiding The Winner's Curse. One of the most "rate-sensitive" property sectors, Net Lease REITs have surprisingly been the best-performing major property sector since early 2021 despite the significant rise in interest rates. Private market values have remained far "stickier" than comparable public market assets. Increases in these REITs' cost of capital have far-outpaced cap rate increases, resulting in record-low investment spreads. Despite the tighter investment spreads, the pace of acquisition activity for some REITs slowed only modestly in late 2022, a strategy that could prove costly if rates remain persistently elevated. Strong balance sheets and lack of variable rate debt exposure have positioned these REITs to be aggressors as over-levered private players seek an exit, but these REITs must wait until the price is right lest they risk falling prey to the "winner's curse." We see the best value in REITs focusing on “middle-market” tenants and the middle-tier of cap rates where inflation-hedging lease structures and initial yields grant more breathing room for higher rates.

Additional Headlines from The Daily REITBeat on Income Builder

• Barclays upgraded REG to Overweight from Equalweight & upgraded COLD to Equalweight from Underweight

• Barclays downgraded BXP to Equalweight from Overweight & downgraded SLG to Underweight from Equalweight 

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs finished lower today with residential mREITs slipping 1.7% while commercial mREITs dipped 2.2%. Western Asset Mortgage (WMC) was among the better-performers today despite reducing its dividend by about 13% to $0.35/share. WMC was one of the REITs we flagged as at-risk for a dividend cut in our updated Mortgage REITs report published last week. WMC reported that its estimated Book Value Per Share ("BVPS") as of February 28, 2023, was approximately $16.95, up about 8% since the end of Q4. Lument Finance (LFT) rallied more than 3% after reporting better-than-expected results, noting that its Book Value Per Share was roughly flat in Q4 at $3.50 .

As discussed in Mortgage REITs: High-Yield Opportunities & Risk, mREITs have been slammed by the fallout of the ongoing regional banking crisis amid a resurgence of interest rate volatility and credit concerns, erasing their once-robust gains for 2023. Commercial mREIT exposure to the troubled office sector has come into focus following a wave of mega-sized loan defaults from over-levered private owners. For Residential mREITs, Book Values remain in decent-shape as MBS spread-widening has been more-than-offset by a decline in benchmark rates, but sharp changes in rates heighten the hedge-related risk. Despite paying average dividend yields in the low-teens, the majority of mortgage REITs are still able to cover their dividends, but we identified several mREITs that are most at-risk of dividend reductions and broader risk factors.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook this weekend.

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